What we do not need now is an orgy of further bank bashing; no good has ever come of it. We would all be the losers, but nor should Parliament or the Government wilt in the face of inevitable bank lobbying and water down these proposals. What we need now is to maintain

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all party co-operation for reform, and to ensure that these reforms are implemented by banks, regulators and the Government.

If they are implemented, they will complete a three-stage reform process. It began with regulatory structure: twin peaks. It was then taken forward by the Independent Commission on Banking, which gave us reform of bank structure: ring-fencing. In the third stage, the Parliamentary Commission on Banking Standards has sought to provide a fundamental reform and improvement of banking standards, on the basis of which we can create a more settled system of regulation for banks.

All this is a great challenge, but it is also a great opportunity. It is an opportunity for all of us, and in particular the banks, to demonstrate a commitment to improving standards and to putting an end to the rip-off—of both the taxpayer and the consumer—culture that has marked recent years. It is also incumbent upon us here to show a preparedness to help restore trust by supporting banks where they show a willingness constructively to engage in implementing these proposals.

Mr McFadden:
I do not propose to follow the hon. Member for Chichester (Mr Tyrie) by making a wide-ranging speech on the recommendations of the banking commission’s final report, as he has set them out perfectly adequately. However, I do want to say that I do not think the Minister has served himself or this discussion well by publishing the Government’s conclusions at lunchtime today, and then coming along and making a de facto statement of new policy, thereby simply compounding the sense of frustration in this House about the adequacy of the procedures for discussing these issues. Instead of going over all of that in great detail, however, I want to concentrate on the amendments before us, and on the discussion of ring-fencing and separation. I specifically want to talk about amendments 17 and 18 in the name of the shadow Chancellor and his shadow Treasury team colleagues; and amendment (a) to Government amendment 6 and amendment 19 in the name of the hon. Member for Chichester.

The banking commission’s first report, issued before Christmas, focused on ring-fencing and separation. It made two principal recommendations in respect of what has become known as electrification of the ring fence, which is the power to go further than the ring fence and enforce full separation between investment and retail banking.

The first of those proposed powers was in respect of individual institutions, and it was accepted by the Government, at least in name. The second power was in relation to the sector as a whole, and it was not accepted by the Government. No convincing reason has been given for accepting one and rejecting the other. The Government have today tried to make a virtue of issuing a response to the banking commission’s final report which says they broadly support its conclusions, yet in terms of the legislation before us the Government are continuing to reject a major recommendation of our first report, and as we have teased out of the Minister, even in the document published at lunchtime, they are rejecting recommendations on UKFI and regional banking. We may learn about others, too.

On the question of backstop powers to enforce separation in respect of either individual groups or the sector as a whole, one of the clearest lessons from the banking

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crisis of 2007-08 was how interconnected the banking system is. Institutions involved in banking are not islands cut off from one another. They lend money to one another. They engage in the same practices. Their culture is often shared. They place similar bets. When one falls, it often has the capacity to drag others down with it, as we learned to our great cost.

The same is true of the standards and culture questions we examined in such detail after Christmas. The LIBOR fixing was the straw that broke the camel’s back in terms of the establishment of the commission, but that did not just happen within one bank. Groups of traders within banks were co-operating with one another to rig the interest rates, and groups of traders across different banks were co-operating with one another to rig the interest rates. Against that background, it makes no sense at all to restrict the policy armoury that this Bill establishes to respond to the undermining of the system by taking powers that will affect only individual banking groups and not the sector as a whole. As the hon. Member for Chichester said about our recommendation on new criminal offences, some of those powers may never need to be used, but their existence on the statute book should focus the minds of those running these major organisations.

John Thurso (Caithness, Sutherland and Easter Ross) (LD):
We also discussed at length the fact that, if we do not have the weapon in the armoury, we cannot use it, and it is usually too late to put it in place once a crisis comes along. Far better to have the gun in the locker, even if we never use it, than not to have it at all.

Mr McFadden:
I entirely agree.

Mark Garnier (Wyre Forest) (Con):
To follow up on that point, rather than having a gun in the locker, some of these powers should be seen as akin to a nuclear deterrent. As parliamentary commission members will remember from doing the media rounds after the publication of the report, one of the big questions was whether Fred Goodwin would have gone to prison if we had had these powers in place. The answer to that is that RBS would not have gone bust in the first place. The deterrent element of these powers, rather than the enforcement element, is what is important.

Mr McFadden:
The hon. Gentleman makes a very good point. Without wishing to pursue this analogy too far, the difference between a gun in the locker and the nuclear deterrent is that it is conceivable we would use the gun in the locker, but less so the nuclear deterrent. I am therefore not entirely sure which of the two commission members has got this quite right, but deterrence is certainly part of the effect we are looking for.

To return to the issue of the power to separate in respect of one institution or the sector as a whole, my overall reflection, having served on the commission for the past year is that, although its recommendations should be supported, even if we take all the steps set out—even if we put a new system of regulation in place, including the twin peaks system, even if we have the ring-fencing powers on structure that are in this Bill, and even if we faithfully implement the standards and

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culture recommendations to which the hon. Member for Chichester referred—it would still be rash to come to the conclusion that we had fully resolved the problems of too big to fail or too complex to manage. These reforms should be implemented and they can make a difference, but if we think we have fully resolved the problems of this huge sector, we will be guilty of complacency and possibly kidding ourselves. The problem of too big to fail is still there.

Our recommendations will make a difference but we also need powerful weapons, even if their use is unlikely, to enforce good standards and to make those running banks think long and hard about the consequences before they decide to test or game the system in any situation in future. That is why I think my hon. Friend the Member for Nottingham East (Chris Leslie) is right to say that a periodic review of ring-fencing and how it is operating is a good idea. It is why I support a more general power, to be held by the Government, to allow broader separation if the ring-fencing reforms do not work. That is what amendments 17 and 18 are designed to achieve and they are very much in line with the recommendations of the commission’s first report.

6.30 pm

I should also say that there is nothing partisan or party political about the amendments, and the Government do not need to be over-defensive when discussing them. All that my hon. Friend has been guilty of is trying faithfully to reflect in his amendments the work of the cross-party commission. So I encourage the Minister to respond with an open mind and not to think that it will reflect badly on the Government if they change their minds at this stage or have a second thought. I do not think this situation is like that, given the cross-party nature of the work led by the hon. Member for Chichester.

I wish to say a word or two about the hon. Gentleman’s amendment 19 and amendment (a) to Government amendment 6. That is about the separation of individual groups, and there are two visions of how that should be done. The Government’s vision, as set out in amendment 6, has too many barriers and will take too long. Hon. Members will have been shocked at the notion that an in-principle decision could be made to act and things still would not be complete six years later. The amendment gives the appearance of accepting a recommendation to electrify the ring fence but does not give the reality. The Minister’s electrified ring fence would not shock a mouse, let alone a powerful, well-resourced, well-financed industry that is used to lobbying, used to gaming the system and used to getting its own way. So he should give careful and positive consideration to the amendments tabled by the hon. Member for Chichester.

The Minister said in his opening remarks, “Of course we will look at this. We will look at the wording and so on again.” I hope that the hon. Member for Chichester does not accept too readily such assurances, which can mean little in the long run. I hope he does not sell himself too cheaply when he decides later this evening whether to put his amendments to the vote, because, as he set out, there is a vast difference between deciding to go down this road in fairly sharp order and waiting six years. There is a big difference, in terms of both the bureaucracy and the number of hoops to be jumped through if one is serious about this, between the hon. Gentleman’s amendment and the elongated approach set out in Government amendment 6. There is a big

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difference between the Minister’s approach and that set out by the hon. Member for Chichester. We need more than warm words that the Government might think about this a little more in future. I hope that the hon. Gentleman will insist on a bit more than that before deciding not to press his amendments later this evening.

In conclusion, we are dealing with a very important part of this discussion; it is stage two of these reforms, if we regard the regulatory changes as stage one. The commission believed that there was a relationship between structure and culture, and that is at the heart of the amendments. The recommendations for electrification aimed to reinforce that relationship to stop the kind of gaming of the system that has happened in that past and to make sure that the intention of the Bill is faithfully reflected in practice. That intention is well worth supporting.

John Thurso:
May I begin by apologising to you, Mr Deputy Speaker, and to the Minister for the fact that I arrived after the start of the debate? The flight down was fine, but the Gatwick Express was not. Had it not been for that, I would certainly have been here.

May I briefly echo the words of my hon. Friend the Member for Chichester (Mr Tyrie) in praising the staff of the commission, who did a truly outstanding job? One thing we did was to break out into panels—he chaired one, as did I and nearly everyone else at some point—where we had individual staff, and they were very impressive and helpful.

I wish briefly to address a question raised by the hon. Member for Chichester, who chaired the commission, by explaining why I feel it is of the utmost importance that the proposals we made are not only taken seriously but passed into statute, and why we came to some of our conclusions. We deliberated on the issues for hours and hours. As anyone who has read the transcripts of the Treasury Committee’s meetings from years gone by will know, I started out seeing things from a full separation point of view. I am a fairly unreconstructed Glass-Steagall supporter, but I do think that one needs to be guided by the evidence. The commission received a great deal of evidence, and I came to the view that although that principle is still one that I adhere to and think is right, there were greater complications in today’s modern operation of the financial services and markets than perhaps had existed when Glass and Steagall got together and that it was wise, therefore, to listen on that. So what I looked for, as did other colleagues who came at it from different angles, was to give the best effect to what we were seeking to achieve.

The right hon. Member for Wolverhampton South East (Mr McFadden) rightly said that the commission linked structure and culture, and I was struck by the way in which the different cultures in banking are competing. One of the easiest ways to look at this, whether we are considering the Volcker rule, prop trading or whatever, is that there are two distinct cultures in every large banking organisation. The first of those is the professional culture of the people seeking to work with and to help individual clients, who are involved in investing or looking after depositors. I do not deny that the vast majority of people operating in the world of banking are professional, wish to be professional and wish to have high standards. The second is the completely separate trading culture, where there is no client at the end of the day; it is a zero-sum game where two people,

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or two sets of people, are trading specifically to make money and to beat the guy on the other side of the trade.

The problem so often was that although trading was necessary to give effect to that desired on the investment side, when the trading side took over in terms of profit and culture it infected the other side. The whole thing is about seeking to keep the cultures apart. People have talked about high-street commercial banking as being good and investment merchant banking as being a casino and being bad, but I do not take that view. I would split the types into three, because there is retail and commercial banking, investment banking and trading. All three have their uses, and how they relate and how they are governed is the important thing.

The universal bank clearly works, but if all the banks are universal banks, it does not, and that is the problem with it. If everybody is pursuing the same model, there is a real danger that the riskier side infects the more prudent side.

Kelvin Hopkins (Luton North) (Lab):
The ordinary depositor—the ordinary working person who puts their money in their bank and wants to use it—would be deeply worried if they felt, and if it were the case, that their money was being gambled with by these risk-taking buccaneers in the City. Is there not a very strong case for making sure that ordinary people, such as me, who do not gamble in that way can have their banking protected from such gambling?

John Thurso:
The hon. Gentleman makes exactly the point I am in the process of making, but he does it more simply, and I thank him for that. That is the key point about the ring fence. The utility aspects of banking, which are operating the payment system and taking deposits, should be so constructed within an entity that when a bank fails—I say when, not if, because there will be another bank failure and our purpose is to try to make it easier for banks to be resolved so there is less likelihood of taxpayer intervention, meaning that the bank will be more likely to be allowed to go under and that bankers will be likely to be more prudent—the ring fence enables that while protecting the ordinary depositor and the payment systems.

This is a long and complicated subject, as I learned over many hours, and the flow of capital from the lady who puts some money into the bank to the company that needs it to expand and grow the economy is necessarily complex. One must therefore be careful—[Interruption.] I know that other hon. Members want to speak and I promised that my remarks would be brief, so before I get a beady eye from you, Mr Deputy Speaker, I ask the hon. Member for Luton North (Kelvin Hopkins) to let me move on.

The critical point, which I completely accept, is that the compromise we came to is the ring fence. The compromise holds good, however, only if the ring fence works properly. Our conclusion was that it would not work if it were not reinforced, and the term “electrified” was coined. The point made by the right hon. Member for Wolverhampton South East was that if one has at one’s disposal the ability to do something—the armoury, call it what you will—those who are engaged in the activity will check whether they are being looked at before they engage in it. It is the modern equivalent of

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the Governor’s eyebrow. If we do not have that, we will simply have a lot of regulation that might lead not to a successful conclusion but to a long dialogue that leads nowhere between the regulator, the Treasury and the institution. People must believe that when the weapon, whatever it is, is deployed, it will have a consequence. That is the essential point.

In conclusion, I think all members of the parliamentary commission came to a unanimous view. We started from different viewpoints and with different concepts, but we agreed—all five from this House, all five from the other place: all 10 of us together—that to give effect to the ring fence it needed to be reinforced. We thought it could be done in this way and my hon. Friend the Member for Chichester has laid out the arguments perfectly.

Mark Durkan (Foyle) (SDLP):
In following the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso), I apologise for the fact that transit issues meant that I, too, missed the start of the debate. I will take up only a little time in the Chamber today, but, following the comments made by the hon. Gentleman and by the right hon. Member for Wolverhampton South East(Mr McFadden), it is important to make the point that it is not just those who have served the House well on the Parliamentary Commission for Banking Standards who have concerns about such issues and can see the difference between the Government’s offer and the amendments tabled by Opposition Front Benchers and by the hon. Member for Chichester (Mr Tyrie).

We talk about the electrified ring fence and, essentially, the Government are offering us a Fisher-Price electrified ring fence—a VTech model. They have looked up ring fence in the index of the Argos catalogue and gone for the one in the toy pages. There is not much point the Government’s saying they have taken everything into account, that this is the best model and that it will give everybody reliable assurances. Frankly, that is like trying to pretend that a tyre is flat only at the bottom and that this is just a minor stylistic difference about perception. The difference is about substance and reliability.

I encourage the Minister to listen to what right hon. and hon. Members on both sides of the House have said, and particularly to those who have had the best insight into these issues through the parliamentary commission and who have changed and modified their views, like the hon. Member for Caithness, Sutherland and Easter Ross. They have been able to give it more consideration than someone such as me, who comes to the question on a reflex reaction of full separation.

I recognise that the ring fence is the only show in town, but it must be reliable and meaningful. The Government’s proposed procedure in amendment 6 could take longer than the life of a Parliament to have an effect. There will be not just the preliminary decisions but the Treasury consents required for those decisions, and tribunals after the warnings and the decisions, then variations and consultation between the regulators—the whole thing will go on.

6.45 pm

If we are legislating about something we have reason to fear might arise in the life of the next Parliament, is it credible that we expect those who sit in that Parliament

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to say, “Thank God for the legislation the previous Parliament passed. They equipped us to deal with this situation. They learned the lessons of LIBOR and everything else and made sure the regulator had powers to deal with egregious breaches and circumstances that nobody would have thought of when they were legislating”? We cannot legislate for every contingency, but we have learned from LIBOR and so on that we must legislate for all sorts of inconceivable excesses that might arise, as well as for things that might be felt to be excesses in the eyes of this House and of a wise Committee such as the Treasury Committee.

We should not deny regulators the back-up equipment that would be needed in such a situation. As a Member from Northern Ireland, I will not get into “guns in the locker” and so on, as other hon. Members have. I will talk about tools in the toolkit and equipment at base that might be needed in an extreme situation, and clearly the regulators need such equipment.

We as a Parliament also need to learn the lessons of the past. We made false assumptions that things were going swimmingly in the City and everything was okay, which is why the Opposition’s proposals for a periodic review are so important. People do not trust Parliament to be alert enough, which is why we need to legislate for ourselves and for the regulators—and, most importantly, to regulate for the public interest.

Mark Garnier:
I, too, pay tribute to the members of the parliamentary commission, with whom I served for 10 months. Huge numbers of people were involved as well as huge amounts of effort. One statistic that has not come out yet is that we apparently asked 9,198 questions of our witnesses, so we certainly got stuck into it in a big way. It was truly a tour de force, as Members can see from the 571-page document I have in my hand.

The Commission was an incredibly important piece of work. We have been trying to deal with the fundamental loss of trust in banking and what pleased me enormously was that one of the passages quoted relatively early in the report, on page 83, was from one of our big banks, Lloyds Banking Group, and was about trust. Let me read it out:

“Trust goes to the heart of what banking is about. Customers need to be able to trust their bank to look after their savings. They need to trust their bank to manage their financial transactions smoothly; trust that their bank will be diligent and not provide levels of credit or mortgage that are more than the customer can re-pay; and trust their bank to provide products that genuinely meet the customer’s needs and which the customer can understand.”

That has been crucial to the problem we have had: of course we considered LIBOR and all the various scandals, but at the end of the day there is a fundamental mistrust between the consumer, who is not very well educated, and the banks, which are well educated. In part, we are seeking to resolve that misbalance of trust.

I urge the Minister not to be shy in legislating to help build that trust. As TheCityUK wrote, again cited on page 83:

“The sustainability of the UK’s position as the pre-eminent global financial services centre is grounded in the integrity of its financial markets and probity of market participants.”

That is key to the debate about ring-fencing, criminal sanctions and the various other important measures available to the Government in the arms race in which we are involved—ranging from the gun locker of the

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hon. Member for Caithness, Sutherland and Easter Ross (John Thurso) to my offshore nuclear deterrent—to ensure that the people who run the banks pay attention and take seriously their role in looking after those institutions. I speak as someone who spent 17 years as an investment banker and 10 years as a hedge fund manager. As I have now gone into politics, I have the hat trick of holding the three most unpopular jobs on the planet—I plan to become a traffic warden when I leave this place.

We hear threats from the banking community that if we over-regulate, that community will get up and go, but there are two incredibly important points to consider, the first of which is: where would the banks go? They do not have a big range of options. A bank that wanted to go to the far east, for example, would face several problems, not least of which is the fact that were HSBC to up sticks and go to Singapore—this would apply to the remainder of the major four banks—its balance sheet would be about 1,100% of the country’s gross domestic product, and no regulator would enthusiastically receive a bank of such a size. Secondly, we should remember that several factors in this country are incredibly important to banks, such as our robust, transparent and tried-and-tested legal system. We are a member of the single market, which gives banks access to the whole of Europe; we speak English, which is the language of the international business and banking community; and we are also at the centre of the time zones.

Our regulatory regime is also absolutely crucial. A great deal of our work was to try to get rid of the implicit guarantee whereby the Government are seen as standing behind the banks in case they fall over. That guarantee can be worth anything up to £40 billion a year, depending on the stage of the cycle, and that gives the big four banks an advantage. The problem is that that anti-competitive advantage represents another barrier to entry for challenger banks, so we need to get rid of the implicit guarantee. However, by regulating firmly, well and efficiently, and by winning the race to the top on regulation, we will replace the implicit guarantee with a cheaper funding rate for the UK banks, because they will see large amounts of international capital coming to the UK to take advantage of the protection that our regulatory and legal regimes provide. I therefore urge the Minister not to be shy about coming forward and to consider carefully the amendments proposed by my hon. Friend the Member for Chichester (Mr Tyrie), which reflect the recommendations of the Parliamentary Commission on Banking Standards and have a great deal of merit.

Greg Clark:
We have had a fascinating, high-quality debate. I am grateful for the contributions of all hon. Members, but especially for those of the Members who served with such distinction on the Parliamentary Commission on Banking Standards: my hon. Friend the Member for Wyre Forest (Mark Garnier); the right hon. Member for Wolverhampton South East (Mr McFadden); the hon. Member for Edmonton (Mr Love), who is no longer in the Chamber; the Chair of the commission, my hon. Friend the Member for Chichester (Mr Tyrie); and the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso). With the help of Members of the other place, they laboured hard to produce a report that not only will stand the test of time, but will be a reference document for many generations in this

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country and throughout the world. The report will be seen as a major contribution to addressing the less tangible aspects of culture and standards, which is something that has eluded regulators throughout the world. I am sure that the report will be read with a great deal of interest.

The report’s central judgment includes the acute point that for too long questions of standards and culture have been contracted out to regulators, rather than being an intrinsic part of the institutions themselves. That aspect of the report stood out as the essence of the required change, because it should no longer be simply for the regulators to decide on such questions, as the culture throughout the institutions should reflect the correct standards that we expect.

I spoke at length at the beginning of the debate, so I shall deal briefly with several of the points that hon. Members raised. I was asked about timetabling. On Second Reading, I made two commitments, the first of which was that the House would have adequate time to consider all provisions, including amendments proposed by the parliamentary commission. I hope that hon. Members will concede that I have been true to that in Committee and throughout our two days on Report, and I repeat that that commitment remains as the Bill goes to the other place. I also said explicitly on Second Reading that the recommendations of the commission’s final report on standards and culture would be reflected in amendments to be made in the House of Lords. Of course, those measures will subsequently be considered by this House, so our intention has not changed. It was right to expedite the response to the report so that it was available much more quickly than usual. It has been useful in informing today’s discussions, as will be the case tomorrow, and it will be available to their lordships during their consideration of the Bill.

The hon. Member for Nottingham East (Chris Leslie) asked several specific questions, including about whether Government amendment 8 contained a typo. It does not, but it would require more than the four minutes remaining for me to explain why, so I hope that he will trust me on that at least. The upper tribunal is not a new invention; it is the court that considers all references made under FSMA for adjudication.

The hon. Gentleman made a substantive point about the notice period, as did my hon. Friend the Member for Chichester and the right hon. Member for Wolverhampton South East. I was asked whether an elongated process in some way diminishes the effectiveness of the ring fence. Our intention was—and is—to implement faithfully the parliamentary commission’s recommendation on the institution-specific ring-fencing rule. As I assured my hon. Friend the Member for Chichester, I am confident that if the Government’s proposals can be improved during the Bill’s passage, all his concerns about the use of the power can be addressed. In fact, the procedure under consideration has been described as pressing the nuclear button.

Mr Tyrie:
I think that was a concession, so I am extremely grateful to the Minister. I am also grateful that the response was published at the earliest opportunity—it could have been delayed, so at least we have had a chance to look at it. That shows us that the Government are listening, and the response will be helpful in the other place. Above all, it gives us more

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confidence that there will be full implementation of the proposals. The Government have indicated their general support for them, so I hope that we will not have to go through a rigmarole to get the necessary provisions on the statute book.

Greg Clark:
I am grateful for my hon. Friend’s intervention. I always take praise when it comes—especially from him, as he is often very flinty in issuing it. I do not think that what I said amounts to a concession, because it has always been our intention to reflect the spirit of his suggestion.

Let me make an important point on the process that my hon. Friend describes. In his amendments, he does not have a time period in mind for the exercise of the power.

Mr McFadden rose—

Greg Clark:
I have one minute left, so the right hon. Gentleman will understand that I cannot give way. The proposal that there be five years to implement the action has been discussed with the regulators; it reflects best regulatory practice. In point of fact, if there were no time limit in the Bill, which is what one of the amendments tabled by my hon. Friend would ensure, that would render the use of the power without limit, so I think we are in the same territory—the right territory—in wanting to specify that there should be a limit. It should be clearly understood that there is a limit to the use of the electrification powers, in terms of a timetable, and a deadline for action. Of course it is right that the regulators should advise on the appropriate use of that. In terms of the amendment—

7 pm

Debate interrupted (Programme Order, this day).

The Deputy Speaker put forthwith the Question already proposed from the Chair (Standing Order No. 83E), That the amendment be made.

Question agreed to.

Amendment 1 accordingly agreed to.

The Deputy Speaker then put forthwith the Questions necessary for the disposal of the business to be concluded at that time (Standing Order No. 83E).

Amendment made: 2, page 2, line 10, at end insert—

‘(5) In section 2J of FSMA 2000 (interpretation of Chapter 2 of Part 1)—

‘(4) In subsection (3)(c), “failure” is to be read in accordance with section 2J(3) to (4).’.—(Greg Clark.)

Clause 4

Ring-fencing of certain activities

Amendment made: 6, page 9, line 21, at end insert—

‘Group restructuring powers

142JA Cases in which group restructuring powers become exercisable

(1) The appropriate regulator may exercise the group restructuring powers only if it is satisfied that one or more of Conditions A to D is met in relation to a ring-fenced body that is a member of a group.

(2) Condition A is that the carrying on of core activities by the ring-fenced body is being adversely affected by the acts or omissions of other members of its group.

(3) Condition B is that in carrying on its business the ring-fenced body—

(a) is unable to take decisions independently of other members of its group, or

(b) depends on resources which are provided by a member of its group and which would cease to be available in the event of the insolvency of the other member.

(4) Condition C is that in the event of the insolvency of one or more other members of its group the ring-fenced body would be unable to continue to carry on the core activities carried on by it.

(5) Condition D is that the ring-fenced body or another member of its group has engaged, or is engaged, in conduct which is having, or would apart fro m this section be likely to have, an adverse effect on the advancement by the appropriate regulator—

(a) in the case of the PRA, of the objective in section 2B(3)(c), or

(b) in the case of the FCA, of the continuity objective.

(6) The appropriate regulator may not exercise the group restructuring powers in relation to any person if—

(a) either regulator has previously exercised the group restructuring powers in relation to that person, and

(b) the decision notice in relation to the current exercise is given before the second anniversary of the day on which the decision notice in relation to the previous exercise was given.

(7) In this section and sections 142JB to 142JG “the appropriate regulator” means—

(a) where the ring-fenced body is a PRA-authorised person, the PRA;

(b) where it is not, the FCA.

142JB Group restructuring powers

(1) In this Part “the group restructuring powers” means one or more of the powers conferred by this section.

(2) Where the appropriate regulator is the PRA, the powers conferred by this section are as follows—

(a) in relation to the ring-fenced body, power to impose a requirement on the ring-fenced body requiring it to take any of the steps mentioned in subsection (5),

(b) in relation to any member of the ring-fenced body’s group which is a PRA-authorised person, power to impose a requirement on the PRA-authorised person requiring it to take any of the steps mentioned in subsection (6),

(c) in relation to any member of the ring-fenced body’s group which is an authorised person but not a PRA-authorised person, power to direct the FCA to impose a requirement on the authorised person requiring it to take any of the steps mentioned in subsection (6), and

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(d) in relation to a qualifying parent undertaking, power to give a direction under this paragraph to the parent undertaking requiring it to take any of the steps mentioned in subsection (6).

(3) Where the appropriate regulator is the FCA, the powers conferred by this section are as follows—

(a) in relation to the ring-fenced body, power to impose a requirement on the ring-fenced body requiring it to take any of the steps mentioned in subsection (5),

(b) in relation to any member of the ring-fenced body’s group which is an authorised person but not a PRA-authorised person, power to impose a requirement on the authorised person requiring it to take any of the steps mentioned in subsection (6),

(c) in relation to any member of the ring-fenced body’s group which is a PRA-authorised person, power to direct the PRA to impose a requirement on the authorised person requiring it to take any of the steps mentioned in subsection (6), and

(d) in relation to a qualifying parent undertaking, power to give a direction under this paragraph to the parent undertaking requiring it to take any of the steps mentioned in subsection (6).

(4) A parent undertaking of a ring-fenced body by reference to which the group restructuring powers are exercisable is for the purposes of this Part a “qualifying parent undertaking” if —

(a) it is a body corporate which is incorporated in the United Kingdom and has a place of business in the United Kingdom, and

(b) it is not itself an authorised person.

(5) The steps that the ring-fenced body may be required to take are—

(a) to dispose of specified property or rights to an outside person;

(b) to apply to the court under Part 7 for an order sanctioning a ring-fencing transfer scheme relating to the transfer of the whole or part of the business of the ring-fenced body to an outside person;

(c) otherwise to make arrangements discharging the ring-fenced body from specified liabilities.

(6) The steps that another authorised person or a qualifying parent undertaking may be required to take are—

(a) to dispose of any shares in, or securities of, the ring-fenced body to an outside person;

(b) to dispose of any interest in any other body corporate that is a member of the ring-fenced body’s group to an outside person;

(c) to dispose of other specified property or rights to an outside person;

(d) to apply to the court under Part 7 for an order sanctioning a ring-fencing transfer scheme relating to the transfer of the whole or part of the business of the authorised person or qualifying parent undertaking to an outside person.

(7) In subsections (5) and (6) “outside person” means a person who, after the implementation of the disposal or scheme in question, will not be a member of the group of the ring-fenced body by reference to which the powers are exercised (whether or not that body is to remain a ring-fenced body after the implementation of the disposal or scheme in question).

(8) It is immaterial whether a requirement to be imposed on an authorised person by the appropriate regulator, or by the other regulator at the direction of the appropriate regulator, is one that the regulator imposing it could impose under section 55L or 55M.

142JC Procedure: preliminary notices

(1) If the appropriate regulator proposes to exercise the group restructuring powers in relation to any authorised person or qualifying parent undertaking (“the person concerned”), the regulator must give each of the relevant persons a first preliminary notice stating—

8 July 2013 : Column 94

(a) that the regulator is of the opinion that the group ring-fencing powers have become exercisable in relation to the person concerned, and

(b) its reasons for being satisfied as to the matters mentioned in section 142JA(1).

(2) Before giving a first preliminary notice, the regulator must—

(a) give the Treasury a draft of the notice,

(b) provide the Treasury with any information that the Treasury may require in order to decide whether to give their consent, and

(c) obtain the consent of the Treasury.

(3) The first preliminary notice must specify a reasonable period (which may not be less than 14 days) within which any of the relevant persons may make representations to the regulator.

(4) The relevant persons are—

(a) the person concerned,

(b) the ring-fenced body, if not the person concerned, and

(c) any other authorised person who will, in the opinion of the appropriate regulator, be significantly affected by the exercise of the group restructuring powers.

(5) After considering any representations made by any of the relevant persons, the regulator must either—

(a) with the consent of the Treasury, give each of the persons a second preliminary notice, or

(b) give each of them a notice stating that it has decided not to exercise its group restructuring powers.

(6) A second preliminary notice is a notice stating—

(a) that the regulator proposes to exercise the group restructuring powers, and

(b) the manner in which it proposes to do so.

(7) The second preliminary notice must specify a reasonable period (which may not be less than 14 days) within which any of the relevant persons may make representations to the regulator about the proposals.

(8) The regulator must after considering any representations made in response to the second preliminary notice give each of the relevant person s a third preliminary notice stating—

(a) whether it has made any revisions to the proposals, and

(b) if so, what the revisions are.

142JD Procedure: warning notice and decision notice

(1) If the appropriate regulator has given a third preliminary notice, it must either—

(a) if it still proposes to exercise the group restructuring powers, give each of the relevant persons a warning notice during the warning notice period, or

(b) before the end of the warning notice period, give each of them a notice stating that it has decided not to exercise the powers.

(2) The “warning notice period” is the period of 6 months beginning with the first anniversary of the day on which the third preliminary notice was given.

(3) Before giving a warning notice under subsection (1)(a), the appropriate regulator must —

(a) give the Treasury a draft of the notice,

(b) provide the Treasury with any information that the Treasury may require in order to decide whether to give their consent, and

(c) obtain the consent of the Treasury.

(4) The action specified in the warning notice may be different from that specified in the third preliminary notice if—

(a) the appropriate regulator considers that different action is appropriate as a result of any change in circumstances since the third preliminary notice was given, or

(b) the person concerned consents to the change.

(5) The regulator must, in particular, have regard to anything that—

8 July 2013 : Column 95

(a) has been done by the person concerned since the giving of the third preliminary notice, and

(b) represents action that would have been required in pursuance of the proposals in that notice.

(6) If the regulator decides to exercise the group restructuring powers it must give each of the relevant persons a decision notice.

(7) The decision notice must allow at least 5 years from the date of the decision notice for the completion of—

(a) any disposal of shares, securities or other property that is required by the notice, or

(b) any transfer of liabilities for which the notice requires arrangements to be made.

(8) The giving of consent for the purpose of subsection (4)(b) does not affect any right to refer to the Tribunal the matter to which any decision notice resulting from the warning notice relates.

(9) “The relevant persons” has the same meaning as in section 142JC.

142JE References to Tribunal

(1) A notified person who is aggrieved by—

(a) the imposition by either regulator of a requirement as a result of section 142JB(2)(a) or (b) or (3)(a) or (b),

(b) a requirement to be imposed as a result of the giving by one regulator to the other of a direction under section 142JB(2)(c) or (3)(c), or

(c) the giving by either regulator of a direction under section 142JB(2)(d) or (3)(d),

may refer the matter to the Tribunal.

(2) “Notified person” means a person to whom a decision notice under section 142JD(6) was given or ought to have been given.

142JF Subsequent variation of requirement or direction

(1) A regulator may at any time with the consent of the person concerned vary—

(a) a requirement imposed by it as a result of section 142JB(2)(a) or (b) or (3)(a) or (b), or

(b) a direction given by it as a result of section 142JB(2)(c) or (d) or (3)(c) or (d).

(2) The person concerned may at any time apply to the appropriate regulator for the variation of—

(a) a requirement imposed by it as a result of section 142JB(2)(a) or (b)or (3)(a) or (b), or

(b) a direction given by it as a result of section 142JB(2)(c) or (d) or (3)(c) or (d).

(3) Sections 55U, 55V, 55X and 55Z3 apply to an application under subsection (2) as they apply to an application for the variation of a requirement imposed by the appropriate regulator under section 55L or 55M.

142JG Consultation etc. between regulators

(1) Where a notice under section 142JC or a warning notice or decision notice under section 142JD relates to a requirement to be imposed in pursuance of a direction to be given as a result of section 142JB(2)(c) or (3)(c), the appropriate regulator must—

(a) consult the other regulator before giving the notice, and

(b) give a copy of the notice to the other regulator.

(2) The appropriate regulator must consult the other regulator before varying under section 142JF a direction given as a result of section 142JB(2)(c) or (3)(c).

(3) Directions given by the FCA as a result of section 142JB(3)(c) are subject to any directions given to the FCA under section 3I.

142JH Relationship with regulators’ powers under Parts 4A and 12A

(1) Subsection (2) applies in relation to—

(a) a ring-fenced body which is a member of a mixed group, and

8 July 2013 : Column 96

(b) a parent undertaking of such a ring-fenced body.

(2) A regulator may not exercise its general powers in relation to the ring-fenced body or parent undertaking so as to achieve either of the results in subsection (3).

(3) Those results are—

(a) that no existing group member is a parent undertaking of the ring-fenced body;

(b) that the ring-fenced body is not a member of a mixed group.

(4) In subsection (3)(a) “existing group member” means a person who is a member of the ring-fenced body’s group at the time when the requirement is imposed or the direction given.

(5) Except as provided by subsections (1) to (4), the provisions of sections 142JA to 142JG do not limit the general powers of either regulator.

(6) For the purposes of this section, a regulator’s “general powers” are its powers under the following provisions—

(a) section 55L or 55M (imposition of requirements in connection with Part 4A permission);

(b) section 192C (power to direct qualifying parent undertaking).

(7) For the purposes of this section, a ring-fenced body is a member of a mixed group if a member of the ring-fenced body’s group carries on an excluded activity.

Failure of parent undertaking to comply with direction

142JI Power to impose penalty or issue censure

(1) This section applies if a regulator is satisfied that a person who is or has been a qualifying parent undertaking as defined in section 142JB(4) (“P”) has contravened a requirement of a direction given to P by that regulator as a result of section 142JB(2)(d) or (3)(d).

(2) The regulator may impose a penalty of such amount as it considers appropriate on—

(a) P, or

(b) any person who was knowingly concerned in the contravention.

(3) The regulator may, instead of imposing a penalty on a person, publish a statement censuring the person.

(4) The regulator may not take action against a person under this section after the end of the limitation period unless, before the end of that period, it has given a warning notice to the person under section 142JJ.

(5) “The limitation period” means the period of 3 years beginning with the first day on which the regulator knew of the contravention.

(6) For this purpose a regulator is to be treated as knowing of a contravention if it has information from which the contravention can reasonably be inferred.

(7) The requirements that a regulator may be required to impose as a result of a direction under section 142JB(2)(c) or (3)(c) include requirements that t he regulator would not but for the direction have power to impose.

142JJ Procedure and right to refer to Tribunal

(1) If a regulator proposes to take action against a person under section 142JI, it must give the person a warning notice.

(2) A warning notice about a proposal to impose a penalty must state the amount of the penalty.

(3) A warning notice about a proposal to publish a statement must set out the terms of the statement.

(4) If the regulator decides to take action against a person under section 142JI, it must give the person a decision notice.

(5) A decision notice about the imposition of a penalty must state the amount of the penalty.

(6) A decision notice about the publication of a statement must set out the terms of the statement.

(7) If the regulator decides to take action against a person under section 142JI, the person may refer the matter to the Tribunal.

8 July 2013 : Column 97

142JK Duty on publication of statement

After a statement under section 142JI(3) is published, the regulator must send a copy of the statement to—

(a) the person in respect of whom it is made, and

(b) any person to whom a copy of the decision notice was given under section 393(4).

142JL Imposition of penalties under section 142JI: statement of policy

(1) Each regulator must prepare and issue a statement of policy with respect to—

(a) the imposition of penalties under section 142JI, and

(b) the amount of penalties under that section.

(2) A regulator’s policy in determining what the amount of a penalty should be must include having regard to—

(a) the seriousness of the contravention,

(b) the extent to which the contravention was deliberate or reckless, and

(c) whether the person on whom the penalty is to be imposed is an individual.

(3) A regulator may at any time alter or replace a statement issued under this section.

(4) If a statement issued under this section is altered or replaced, the regulator must issue the altered or replacement statement.

(5) In exercising, or deciding whether to exercise, a power under section 142JI(2) in the case of any particular contravention, a regulator must have regard to any statement of policy published under this section and in force at a time when the contravention occurred.

(6) A statement under this section must be published by the regulator concerned in the way appearing to the regulator to be best calculated to bring it to the attention of the public.

(7) A regulator may charge a reasonable fee for providing a person with a copy of the statement published under this section.

(8) A regulator must, without delay, give the Treasury a copy of any statement which it publishes under this section.

(9) Section 192I applies in relation to a statement under this section as it applies in relation to a statement under section 192H.’—(Greg Clark.)

Amendment proposed: 18, page 9, line 21, at end insert—

‘Full separation

142JD General requirement of separation

‘(1) Where the members of any group include one or more ring-fenced bodies and one or more other bodies, the members of the group must, before the end of the period of five years beginning with the relevant commencement date, take steps to secure that there are no members of the group that are ring-fenced bodies.

(2) If in the case of any group steps to secure that there are no members of the group that are ring-fenced bodies are not taken within the period specified in subsection (1)—

(a) at the end of that period the Part 4A permission of each member of the group that is a ring-fenced body shall be treated as having been cancelled to the extent that it relates to a core activity, and

(b) after the end of that period the appropriate regulator must refuse to give any member of the group a Part 4A permission to carry on a core activity.

(3) At the end of the period specified in subsection (1)—

(a) section 142H(1)(b) and (4) to (7), and

(b) section 142JC,

cease to have effect.

(4) In subsection (1) “the relevant commencement date” means the day appointed for the coming into force of section 4 of the Financial Services (Banking Reform) Act 2013 so far as it inserts this section.’.—(Chris Leslie.)

8 July 2013 : Column 98

Question put, That the amendment be made.

The House divided:

Ayes 225, Noes 274.

Division No. 46]

[

7 pm

AYES

Abbott, Ms Diane

Abrahams, Debbie

Ainsworth, rh Mr Bob

Alexander, rh Mr Douglas

Alexander, Heidi

Ali, Rushanara

Allen, Mr Graham

Anderson, Mr David

Ashworth, Jonathan

Austin, Ian

Bailey, Mr Adrian

Bain, Mr William

Balls, rh Ed

Banks, Gordon

Barron, rh Mr Kevin

Beckett, rh Margaret

Begg, Dame Anne

Benn, rh Hilary

Berger, Luciana

Betts, Mr Clive

Blackman-Woods, Roberta

Blears, rh Hazel

Blomfield, Paul

Blunkett, rh Mr David

Bradshaw, rh Mr Ben

Brennan, Kevin

Brown, rh Mr Nicholas

Brown, Mr Russell

Bryant, Chris

Buck, Ms Karen

Burden, Richard

Byrne, rh Mr Liam

Campbell, Mr Alan

Campbell, Mr Ronnie

Caton, Martin

Champion, Sarah

Chapman, Jenny

Clark, Katy

Clarke, rh Mr Tom

Clwyd, rh Ann

Coaker, Vernon

Coffey, Ann

Connarty, Michael

Cooper, Rosie

Cooper, rh Yvette

Corbyn, Jeremy

Crausby, Mr David

Creagh, Mary

Creasy, Stella

Cruddas, Jon

Cryer, John

Cunningham, Alex

Cunningham, Mr Jim

Cunningham, Sir Tony

Curran, Margaret

Dakin, Nic

Danczuk, Simon

David, Wayne

Davidson, Mr Ian

Davies, Geraint

De Piero, Gloria

Denham, rh Mr John

Dobson, rh Frank

Docherty, Thomas

Donaldson, rh Mr Jeffrey M.

Donohoe, Mr Brian H.

Doran, Mr Frank

Doughty, Stephen

Dowd, Jim

Doyle, Gemma

Dromey, Jack

Dugher, Michael

Durkan, Mark

Eagle, Ms Angela

Eagle, Maria

Edwards, Jonathan

Ellman, Mrs Louise

Engel, Natascha

Esterson, Bill

Evans, Chris

Farrelly, Paul

Field, rh Mr Frank

Fitzpatrick, Jim

Flello, Robert

Flint, rh Caroline

Flynn, Paul

Fovargue, Yvonne

Francis, Dr Hywel

Gapes, Mike

Gardiner, Barry

Gilmore, Sheila

Glass, Pat

Glindon, Mrs Mary

Godsiff, Mr Roger

Goggins, rh Paul

Goodman, Helen

Green, Kate

Greenwood, Lilian

Griffith, Nia

Gwynne, Andrew

Hain, rh Mr Peter

Hamilton, Fabian

Hanson, rh Mr David

Harman, rh Ms Harriet

Harris, Mr Tom

Havard, Mr Dai

Healey, rh John

Hepburn, Mr Stephen

Hermon, Lady

Hilling, Julie

Hodgson, Mrs Sharon

Hoey, Kate

Hopkins, Kelvin

Hosie, Stewart

Howarth, rh Mr George

Hunt, Tristram

Irranca-Davies, Huw

Jackson, Glenda

Jamieson, Cathy

Jarvis, Dan

Johnson, rh Alan

Jones, Graham

Jones, Helen

Jones, Mr Kevan

Jones, Susan Elan

Kaufman, rh Sir Gerald

Keeley, Barbara

Kendall, Liz

Khan, rh Sadiq

Lammy, rh Mr David

Lavery, Ian

Leslie, Chris

Lewell-Buck, Mrs Emma

Lewis, Mr Ivan

Long, Naomi

Love, Mr Andrew

Lucas, Caroline

Lucas, Ian

Mahmood, Shabana

Mann, John

Marsden, Mr Gordon

McCabe, Steve

McCann, Mr Michael

McCarthy, Kerry

McClymont, Gregg

McDonagh, Siobhain

McFadden, rh Mr Pat

McGovern, Jim

McGuire, rh Mrs Anne

McKechin, Ann

McKenzie, Mr Iain

McKinnell, Catherine

Meacher, rh Mr Michael

Mearns, Ian

Miliband, rh Edward

Miller, Andrew

Morden, Jessica

Morrice, Graeme

(Livingston)

Morris, Grahame M.

(Easington)

Mudie, Mr George

Munn, Meg

Murphy, rh Mr Jim

Murray, Ian

Nandy, Lisa

Nash, Pamela

O'Donnell, Fiona

Onwurah, Chi

Osborne, Sandra

Pearce, Teresa

Perkins, Toby

Phillipson, Bridget

Pound, Stephen

Raynsford, rh Mr Nick

Reed, Mr Jamie

Reed, Mr Steve

Reynolds, Emma

Reynolds, Jonathan

Riordan, Mrs Linda

Ritchie, Ms Margaret

Robertson, Angus

Robertson, John

Robinson, Mr Geoffrey

Rotheram, Steve

Roy, Mr Frank

Roy, Lindsay

Ruddock, rh Dame Joan

Sarwar, Anas

Sawford, Andy

Seabeck, Alison

Sharma, Mr Virendra

Sheerman, Mr Barry

Sheridan, Jim

Shuker, Gavin

Skinner, Mr Dennis

Slaughter, Mr Andy

Smith, rh Mr Andrew

Smith, Angela

Smith, Nick

Smith, Owen

Stuart, Ms Gisela

Sutcliffe, Mr Gerry

Tami, Mark

Thomas, Mr Gareth

Thornberry, Emily

Thurso, John

Timms, rh Stephen

Trickett, Jon

Turner, Karl

Twigg, Derek

Twigg, Stephen

Tyrie, Mr Andrew

Umunna, Mr Chuka

Vaz, Valerie

Watts, Mr Dave

Weir, Mr Mike

Whitehead, Dr Alan

Wilson, Phil

Winnick, Mr David

Winterton, rh Ms Rosie

Wishart, Pete

Wood, Mike

Woodcock, John

Woodward, rh Mr Shaun

Wright, David

Wright, Mr Iain

Tellers for the Ayes:

Tom Blenkinsop

and

Alison McGovern

NOES

Adams, Nigel

Afriyie, Adam

Aldous, Peter

Amess, Mr David

Andrew, Stuart

Arbuthnot, rh Mr James

Bacon, Mr Richard

Baker, Norman

Baker, Steve

Baldwin, Harriett

Barclay, Stephen

Barker, rh Gregory

Baron, Mr John

Barwell, Gavin

Bebb, Guto

Benyon, Richard

Berry, Jake

Bingham, Andrew

Blackwood, Nicola

Blunt, Mr Crispin

Boles, Nick

Bone, Mr Peter

Bottomley, Sir Peter

Bradley, Karen

Brady, Mr Graham

Brake, rh Tom

Brazier, Mr Julian

Bridgen, Andrew

Brooke, Annette

Bruce, Fiona

Bruce, rh Sir Malcolm

Burley, Mr Aidan

Burns, Conor

Burrowes, Mr David

Burstow, rh Paul

Burt, Alistair

Burt, Lorely

Byles, Dan

Cairns, Alun

Campbell, rh Sir Menzies

Carmichael, rh Mr Alistair

Carmichael, Neil

Carswell, Mr Douglas

Chishti, Rehman

Clappison, Mr James

Clark, rh Greg

Clarke, rh Mr Kenneth

Clifton-Brown, Geoffrey

Coffey, Dr Thérèse

Collins, Damian

Colvile, Oliver

Cox, Mr Geoffrey

Crabb, Stephen

Crockart, Mike

Crouch, Tracey

Davey, rh Mr Edward

Davies, David T. C.

(Monmouth)

Davies, Glyn

Davies, Philip

Davis, rh Mr David

Dinenage, Caroline

Djanogly, Mr Jonathan

Dorrell, rh Mr Stephen

Doyle-Price, Jackie

Drax, Richard

Duncan, rh Mr Alan

Duncan Smith, rh Mr Iain

Ellis, Michael

Ellison, Jane

Ellwood, Mr Tobias

Elphicke, Charlie

Eustice, George

Evans, Graham

Evans, Jonathan

Evennett, Mr David

Fabricant, Michael

Fallon, rh Michael

Farron, Tim

Field, Mark

Foster, rh Mr Don

Fox, rh Dr Liam

Francois, rh Mr Mark

Freeman, George

Freer, Mike

Fullbrook, Lorraine

Fuller, Richard

Gale, Sir Roger

Garnier, Sir Edward

Gauke, Mr David

Gilbert, Stephen

Gillan, rh Mrs Cheryl

Glen, John

Goodwill, Mr Robert

Grant, Mrs Helen

Gray, Mr James

Grieve, rh Mr Dominic

Griffiths, Andrew

Gyimah, Mr Sam

Hague, rh Mr William

Hames, Duncan

Hammond, rh Mr Philip

Hammond, Stephen

Hancock, Matthew

Hands, Greg

Harper, Mr Mark

Harrington, Richard

Harris, Rebecca

Hart, Simon

Haselhurst, rh Sir Alan

Hayes, rh Mr John

Heald, Oliver

Heath, Mr David

Hemming, John

Henderson, Gordon

Herbert, rh Nick

Hinds, Damian

Hoban, Mr Mark

Hollingbery, George

Hollobone, Mr Philip

Holloway, Mr Adam

Hopkins, Kris

Howarth, Sir Gerald

Howell, John

Hughes, rh Simon

Hunt, rh Mr Jeremy

Hurd, Mr Nick

Jackson, Mr Stewart

Jenkin, Mr Bernard

Johnson, Joseph

Jones, Andrew

Jones, Mr Marcus

Kawczynski, Daniel

Kelly, Chris

Kirby, Simon

Knight, rh Mr Greg

Kwarteng, Kwasi

Laing, Mrs Eleanor

Lamb, Norman

Lancaster, Mark

Lansley, rh Mr Andrew

Latham, Pauline

Laws, rh Mr David

Leadsom, Andrea

Lee, Jessica

Lee, Dr Phillip

Leech, Mr John

Letwin, rh Mr Oliver

Lewis, Brandon

Lewis, Dr Julian

Liddell-Grainger, Mr Ian

Lidington, rh Mr David

Lilley, rh Mr Peter

Lloyd, Stephen

Loughton, Tim

Luff, Peter

Lumley, Karen

Maude, rh Mr Francis

May, rh Mrs Theresa

Maynard, Paul

McCartney, Karl

McIntosh, Miss Anne

McPartland, Stephen

McVey, Esther

Menzies, Mark

Metcalfe, Stephen

Mills, Nigel

Milton, Anne

Mitchell, rh Mr Andrew

Moore, rh Michael

Mordaunt, Penny

Morris, Anne Marie

Morris, James

Mosley, Stephen

Mowat, David

Mulholland, Greg

Munt, Tessa

Murray, Sheryll

Murrison, Dr Andrew

Neill, Robert

Newmark, Mr Brooks

Newton, Sarah

Nokes, Caroline

Norman, Jesse

Nuttall, Mr David

Offord, Dr Matthew

Ollerenshaw, Eric

Opperman, Guy

Ottaway, Richard

Paice, rh Sir James

Parish, Neil

Patel, Priti

Paterson, rh Mr Owen

Pawsey, Mark

Penning, Mike

Penrose, John

Pickles, rh Mr Eric

Pincher, Christopher

Poulter, Dr Daniel

Prisk, Mr Mark

Pritchard, Mark

Pugh, John

Raab, Mr Dominic

Randall, rh Mr John

Reckless, Mark

Redwood, rh Mr John

Rees-Mogg, Jacob

Reevell, Simon

Reid, Mr Alan

Rogerson, Dan

Rosindell, Andrew

Rudd, Amber

Ruffley, Mr David

Russell, Sir Bob

Rutley, David

Sanders, Mr Adrian

Sandys, Laura

Scott, Mr Lee

Selous, Andrew

Shapps, rh Grant

Shelbrooke, Alec

Simmonds, Mark

Simpson, Mr Keith

Skidmore, Chris

Smith, Miss Chloe

Smith, Henry

Smith, Sir Robert

Soames, rh Nicholas

Spencer, Mr Mark

Stephenson, Andrew

Stevenson, John

Stewart, Bob

Stewart, Iain

Stewart, Rory

Streeter, Mr Gary

Stride, Mel

Stuart, Mr Graham

Stunell, rh Sir Andrew

Sturdy, Julian

Swales, Ian

Swayne, rh Mr Desmond

Swinson, Jo

Swire, rh Mr Hugo

Syms, Mr Robert

Teather, Sarah

Timpson, Mr Edward

Tomlinson, Justin

Truss, Elizabeth

Turner, Mr Andrew

Uppal, Paul

Vara, Mr Shailesh

Vickers, Martin

Walker, Mr Charles

Walker, Mr Robin

Wallace, Mr Ben

Ward, Mr David

Weatherley, Mike

Webb, Steve

Wharton, James

Wheeler, Heather

White, Chris

Whittaker, Craig

Whittingdale, Mr John

Wiggin, Bill

Willetts, rh Mr David

Williams, Mr Mark

Williams, Stephen

Williamson, Gavin

Willott, Jenny

Wilson, Mr Rob

Wollaston, Dr Sarah

Wright, Simon

Yeo, Mr Tim

Young, rh Sir George

Zahawi, Nadhim

Tellers for the Noes:

Mark Hunter

and

Nicky Morgan

Question accordingly negatived.

8 July 2013 : Column 99

8 July 2013 : Column 100

8 July 2013 : Column 101

Amendments made: 7, page 13, line 10, leave out from beginning to ‘any’ and insert—

‘(1) This section has effect for the interpretation of this Part.’

Amendment 8, page 13, line 14, at end insert—

‘(3) Any reference to the group restructuring powers is to be read in accordance with section 142JB(1).’

“(1A) The notice in subsection (1) shall include a target for the overall leverage of the UK’s financial system, to encompass also the activities of foreign financial institutions and non-bank originators of credit.”

(4) After section 9D(3) insert—

“(4) After each three month period, the Financial Policy Committee must respond to the notice of the economic policy of Her Majesty’s Government in subsection (1) by notifying the Treasury of—

(a) any action that the Committee has taken to regulate leverage in the financial system to the identified target in a manner consistent with maintaining adequate credit availability and growth in the economy, or

(b) the Committee’s reasons for not intending to act to regulate leverage in the financial system to the identified target.

(5) Notification under subsection (4) must be given in writing.

(6) The Treasury shall—

(a) publish in such a manner as they think fit any notification received under subsection (4), and

(b) lay a copy of such a notification before Parliament.”.’.—(Chris Leslie.)

Brought up, and read the First time.

Chris Leslie:
I beg to move, That the clause be read a Second time.

It is a delight to see the Leader of the House on the Front Bench to debate with me the question of the leverage ratio—I favour the pronunciation “leaverage”—and I am happy to give way to him if he has any concerns about it. As the Leader of the House—[Interruption]—and, indeed, the Minister will know, a bank’s leverage is the ratio of its assets to equity capital. Its equity capital is equal to the value of its assets, minus the value of its liabilities. Higher leverage rates magnify returns, because any growth in assets will be proportionately greater if equity is thin, but—and this is why it matters—the corollary is that any losses are magnified if leverage is greater. Its equity can be wiped out by a smaller shock than would wipe out the equity of a less leveraged institution.

The Government said that they intended to provide the Financial Policy Committee of the Bank of England with a time-varying leverage ratio tool, but not before 2018, and that that would be subject to a review in 2017 to assess progress internationally. The design of the tool would depend, hon. Members will be glad to hear, on European Union legislation, and will be set out in Britain in due course in secondary legislation. I know that they are keen on that particular process.

7.15 pm

The Independent Commission on Banking was clear on this matter, and said that it supported the use of leveraged ratios as a back-stop. It called for a tapering of the requirements when a bank crossed a certain size

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threshold by increasing the minimum leverage ratio from 3%—the Basel proposal—to over 4% on a sliding scale, as the risk weighting of assets to GDP ratio increased from 1% to 3%. The Opposition believe, as do many commentators—this is a question that came up in the recommendations from the Parliamentary Commission on Banking Standards—that reforms are needed to leverage, as well as the risk weighting of assets. In the aftermath of the global financial crisis, regulators introduced the risk weighting of assets process as an antidote to the high-risk, high-reward culture pervasive in banks. That process, however, has been partial, somewhat self-defined by the banks themselves in some cases, and in the European Union, the zero risk weighting attributed to some palpably risky sovereign debts has brought that system into disrepute.

Leverage ratio powers need to be taken in the Bill, and phased in before the EU plans for the end of the decade. That was one of the main conclusions of the Vickers report. Not legislating for leverage restraint is a significant omission from a Bill that the Chancellor claimed would reset the banking system.

Stewart Hosie:
I am very supportive of the notion of legislating now for the leverage provision, but in his new clause, the hon. Gentleman discusses

“a target for the overall leverage of the…system, to encompass…the activities of foreign financial institutions and non-bank originators of credit”—

or shadow banking. Although that might be taken into consideration in the calculation, the FPC would have no power to implement a leverage ratio in the shadow banking sector, so is there not an unintended consequence that leverage ratios may be too high in the formal banking sector to compensate for what the report found?

Chris Leslie:
I am delighted that the hon. Gentleman has taken the trouble to look at the new clause, because it is our second attempt to cajole or persuade the Government to look at this issue. In Committee, we took a different approach to the question of leverage, and tried to clarify that there was a clear power for the Government to act. I hope in the spirit of consensus and trying to move the arguments forward, the Minister and the House will accept that we have taken a new approach, thinking about leverage as it affects the UK economy as a whole. Leverage—and I shall come on to make this argument—is part and parcel of the way in which an economy works, and in the new clause we have looked at a particular design that would encompass other institutions. I do not want to be misinterpreted: we mention foreign banks, for example, but I do not intend any extra-territorial reference in the new clause. It simply makes it clear that the provision has to encompass effective leverage on the UK financial services sector as a whole.

I have referred to the Vickers commission, and it is important that we do not forget the work that it did, and that we pay tribute to it. It said that

“a leverage cap of thirty-three is too lax for systemically important banks, since it means that a loss of only 3% of such banks’ assets would wipe out their capital.”

The commission recommended a 25:1 ratio—a 4% ratio—but the Chancellor dismissed that concern. It is essential that the ring fence is supported by tougher capital requirements, as well as by a leverage ratio.

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The parliamentary commission said that it was not convinced by the Government’s decision to reject the Vickers recommendation to limit leverage in this way. The parliamentary commission said that it

“considers it essential that the ring-fence should be supported by a higher leverage ratio, and would expect the leverage ratio to be set substantially higher than the 3 per cent minimum required under Basel III.Not to do so would reduce the effectiveness of the leverage ratio as a counter-weight to the weaknesses of risk weighting.”

Sir Mervyn King, the former Governor of the Bank of England, said that the leverage ratio turned out to be

“a far better predictor of the institutions that failed in the crisis”

than measures of risk-weighted assets. I could go on; a great deal of debate has taken place on this issue.

Our new clause seeks a way of ensuring clarity on the powers and what sort of process would take place. We suggest that the powers of the Financial Policy Committee in the Financial Services Act 2012 should be amended to make it clear that a target should be set by the Treasury for the overall leverage of the United Kingdom’s financial system to encompass all the activities of those institutions that are originators of credit.

Mr David Ruffley (Bury St Edmunds) (Con):
May I unpick what the hon. Gentleman is saying? Does he mean a minimum leverage ratio or a target? There is a difference. Perhaps he could clarify that.

Chris Leslie:
That is a very good question and I am open to debate on that. I believe that looking at that minimum leverage ratio as a target to be set for the leverage of the system as a whole in the UK would be the point of public policy, which is why it needs to be dealt with in a policy-making context by the Treasury, with reference to Parliament if need be. The key point is that it should then be for the regulators to look at the detailed implementation of that on a firm-by-firm basis.

Essentially, there is a parallel to be drawn between the way that the Chancellor of the Exchequer sets an inflation target for the Bank of England and the Monetary Policy Committee is given operational independence to find ways of meeting that target. The purpose of the debate today is to look at the potential parallel to be drawn there, with a target being set and operational independence for the implementation of that target being given to the Financial Policy Committee and the Bank of England. Over every three-month period the FPC should respond by notifying any changes and any actions that it has taken in order to regulate leverage, so that there is a dialogue and a process that is fairly self-explanatory.

Mr Ruffley:
The hon. Gentleman is being very generous in giving way, but I want to be clear about his proposition. A target would imply that a bank that was just 10 times leverage would have to raise its leverage ratio to 25 times if it was a 4% target, whereas if it was a 4% minimum leverage ratio, that would be totally different. The bank that leveraged 10 times would not be in breach of that.

Chris Leslie:
I understand the hon. Gentleman’s point. Let me be clear. The target that should be set would be for the financial system as a whole. It would be for the regulators to make judgments about firm-by-firm leverage arrangements, so it would be on a more sophisticated

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basis. There is a case to be made for a regulator to look at each individual institution. Some institutions are significantly different from one another. Some of the building societies, for example, have recently been making the point that they have different asset structures and so on, and that exactly the same leverage arrangement across the board for all firms simultaneously would not necessarily be appropriate. In an effort to work towards some way of dealing with the issue, this design is one that I have suggested.

Mr John Redwood (Wokingham) (Con):
In the proposal, the hon. Gentleman suggests that the committee has to take into account

“adequate credit availability and growth in the economy”

and report to the Treasury. Would the Chancellor and the Treasury have any right of veto or influence over that, or would they have to put up with the Bank’s judgment of what is adequate credit growth? That could be rather important if the problem were one of insufficient growth in the economy.

Chris Leslie:
That raises the question of the operation of the inflation target. If I draw a parallel between a leverage target and an inflation target, clearly the Chancellor has been setting out his inflation target. It has been missed on a number of occasions—quite a few months and quarters have gone by—so the interplay between the Chancellor and the Bank of England is critical here. I am more than happy to come back to the issue. My point in the new clause today is that we need to start seriously discussing how, from a UK perspective, we are going to deal with the issue of leverage from a home-grown point of view, rather than waiting for the European Union to come along with a set of arrangements which may or may not fit our circumstances.

Jacob Rees-Mogg:
There are two points that occur on the hon. Gentleman’s target weighting. One is that it is very arbitrary. If the regulator could set it for each individual bank, that would give a very strong arbitrary power to the bank to meet that overall target. The second is that although people say that their assets are particularly good ones and better than others, that is exactly what they said in the crisis and it turned out not to be reliable.

Chris Leslie:
I agree with the hon. Gentleman, but it would be invidious for us as politicians to try to delve into the specific analysis of bank-by-bank asset or liability, quality and the risk weighting of assets. That is why we have regulators and what their job should be, but it is important that as a body politic, so to speak, we make a judgment about the level of leverage that we should have in the economy as a whole. That is why I raise the issue today.

For us, tackling the leverage question is incredibly important. We should not wait for the European Union to decide these things for us. We sought in Committee to clarify this in part. Rather than put it in the “too difficult to handle” box, as the Government seem to be doing, we should try to move forward constructively. The approach that we have taken is on the amendment paper. First, it is necessary to prevent the banks from over-extending themselves beyond the point of safety.

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Ring-fencing does not do that. We think ring-fencing changes should go alongside capital requirements and leverage regulation.

Secondly, we have been hearing arguments recently about the leverage ratio as anathema to bank lending into the real economy. Sometimes it is characterised as one or the other. I do not necessarily agree that there is a seesaw trade-off between the two. Andrew Bailey at the Prudential Regulation Authority has recently made the particularly pertinent argument that capital can be lent onwards in any case, so it should not be a case of one or the other.

For the sake of clarity, in new clause 9 we looked to address this explicitly by framing a leverage target strategy for the system as a whole, which must be constructed in such a manner so as to maintain adequate credit availability to support a growing economy. It is important to recognise that we will always operate with a degree of leverage. That is part and parcel of the way our banking system works, and our constituents rightly want us to focus on getting the economy moving, while preventing excessive risk-taking. In the spirit of constructive engagement, we hope the amendment strikes the right balance.

It is sometimes argued that leverage should be a back-stop rather than a front stop. The argument about what is a back-stop and what is a front-stop can get rather theological. Andy Haldane makes the point in his famous “The Dog and the Frisbee” speech that leverage needs to be brought much further forward as a primary tool for the regulators, and that other capital and risk-weighting issues should be subordinated. The main point is that leverage should be recognised as a key dynamic in our economy and needs to be regulated in a way not dissimilar to the regulation of inflation.

For us, there are three essential elements: set a leverage target for the system as a whole, which is a task for the Government; measure that risk—the threats to whether loans are going to be repaid—more accurately by sector, to determine which sector needs more capital to make it safe if leverage is rising and which could be dealt with in a normal way; stress-test to back-test the pressures in those particular institutions to be clear that the choice of the leverage target is correct. The regulator should do that.

New clause 9 would also augment Bank of England independence in relation to operational decisions on monetary policy and take into account the need to supply credit to the wider economy. I am glad that the Building Societies Association and others support it.

7.30 pm

I know that other Members wish to speak and so will not take much more time. It is not good enough for the Government simply to leave this out of the Bill completely, to leave the regulators slightly powerless on this point and to leave the EU to deal with it. There are ways of overcoming the impact that leverage questions might have on non-plc institutions, such as those building societies, and having the regulator make those operational judgments is one of them, but we must have the safeguard in place. We must also eradicate once and for all the concept of a bank being “too big to fail.” I think that action on leverage would certainly be one way of doing that.

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Mr Redwood:
I remind the House that I provide investment advice on world markets and world economies, but I am pleased to say that it has nothing to do with banking credit or banking leverage, so I feel quite entitled to comment in this important debate.

I welcome what I hope is a probing new clause from the Opposition. It allows us to discuss something that is at the heart of what regulators need to do to have a strong banking sector and economy and to have the comfort at night of knowing that we will not live through another dreadful crisis like the credit crunch of the previous decade. The new clause goes to the heart of the issue: what action should the Government and regulators take to try to ensure that large banks and other institutions advancing credit that can be a risk to the whole system are kept under sensible control, so that we can be pretty confident that, if something goes wrong or the world economy dips, they have the necessary money to pay the bills and deal with any losses that might arise?

If we look at the tragic history of the previous decade, we can see that the then banking regulator in the United Kingdom—I think that it has now admitted this—got it wrong both ways. It wanted the banks to have too little capital, cash and protection, and in the run-up to the credit crisis in 2008 it allowed the most enormous expansion of leverage, which previous generations of regulators had not permitted. Then, in the ensuing panic, when interest rates had to rise to tackle the problem of inflation, it lurched to wanting very high amounts of capital, but at the time the banks could not generate profit and so found that very difficult. That resulted in the previous Government’s decision, in two of the worst cases, that capital should be forthcoming from the state and taxpayers themselves. I think that we all agree that we do not want to go back around that course or to get to the position again where some Members of this House feel that the only option is for the state to provide taxpayer support for organisations that have been too leveraged.

New clause 9 suggests that it is possible to set a leverage ratio for the system as a whole, and it might be, and that might be desirable, and I look forward to the Minister’s response. Of course, the regulator already does that in a way because it sets individual target ratios or capital requirements for all the major banks in the system, so if we aggregate those we get to its view of the aggregate amount of leverage. As the hon. Member for Nottingham East (Chris Leslie) has rightly said, if that overall leverage were to be set for the system as a whole, the regulator would still need to interpret that bank by bank. Some banks would be super-prudent and some would be straining at the other end of the spectrum and might be under special measures with the regulator to try to get their balance sheets into shape.

My particular worry at the moment is that it is never easy managing the transition. We would all be delighted to wake up tomorrow and discover that all the banks are super-safe, but if the price of getting to that stage too quickly is no growth in the economy or, worse still, the onset of another recession because the banks cannot finance the recovery, that would be a bad idea. Many of us would like to see the banks get to better ratios by writing more profitable business and generating more legitimate and sensible levels of profit, rather than having the regulator run the risk of moving too quickly

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to demand that they have much better ratios. The banks would then have to achieve those better ratios by not writing any new business and by trying to get old loans back ever more quickly from businesses that might find it difficult to repay them. Some of those banks, not being very profitable, could not trade themselves out of the difficulties that they found themselves in.

We also need to be conscious of what is happening globally, because although we should not chase the rest of the world if it has a group of regulators that are being far too generous and wish to re-enact the boom-type crisis of the previous decade—I do not think that we are in that position any more; I think that the regulators of the world are all generally trying to be more cautious—we need to ensure that we do not do anything in Britain that is particularly penal. What we need in order to have a prosperous economy is banks with sufficient profit, reserves and capital to be able to finance a normal recovery. It is very unpopular in this country to speak up for banks making profits at the moment, or indeed at any time, but it is important that they generate reasonable working profits, because that is the best way to make them more solvent.

Mr Ruffley:
Is my right hon. Friend as unconvinced as I am by the relatively arbitrary figure of 4% being preferable to 3% for the leverage ratio? Like him, I believe that, if there is going to be any tightening on capital adequacy or leverage, it should be done when the recovery is more surely under way, and 3% is preferable to the 4% recommended by the Vickers commission and the parliamentary commission.

Mr Redwood:
I think that I agree with my hon. Friend. What I am suggesting is that I would like to get closer to 4% and further away from 3% by growth, and I think that that could be inferred in Labour’s new clause, because I noticed that the hon. Member for Nottingham East wisely did not pledge himself firmly to 4%. Although he might secretly want 4%, like the rest of us he is probably wise enough to know that, although it might be nice to have 4% in due course, to lurch straight to a target that some big banks could not meet might be very damaging to the economy.

Neil Parish (Tiverton and Honiton) (Con):
One of the problems at the moment, as I know from my constituency, is that some companies are still finding it difficult to get money from banks, so the higher the leverage requirement, the more the banks will say that they have to keep the capital and cannot lend it. I agree with my right hon. Friend entirely that we have to be very careful about how we move from 3% to 4%, because otherwise it is companies and growth that will suffer.

Mr Redwood:
I think that we have wonderful agreement across the Chamber on this, which might hearten the Minister. We would be happier with 4% than with 3% in general terms, but we do not want to get there too quickly if that means a further jolt to expectations and confidence and further actions by banks to pull back loans, rather than financing the recovery that we clearly need from them.

Mr Love:
One of the banking commission’s recommendations was that that should be devolved to the regulator to decide and that we should not set a

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target or a figure. The Government seem to be resisting that, and for the reasons that have been outlined in relation to growth and living standards. What does the right hon. Gentleman think about the proposal to give that to the regulator earlier than the Government suggest?

Mr Redwood:
I think that a Government have to take responsibility for the big calls on economic policy. They can take very good advice from independent regulators and the Bank of England, and sensible Chancellors take good advice, but ultimately it is the Chancellor of the Exchequer and the Prime Minister of the day who have their names on all that, and the electorate will expect them to be responsible. I think that people believe in independent central banks and independent regulators up to the point where they get it wrong, and then they look to politicians to take the blame. We have just been through a period when the banking regulator, by its own admission, got it very visibly wrong.

Mr Love:
The Government are suggesting that the regulators will get it wrong in 2018, and the commissions say that they will get it wrong a little sooner. Is this not an argument about timing and when the economy will be out of its current difficulties?

Mr Redwood:
It is important that we should have proper discussion and informed debate, taking the best advice, so that we can try to get things right for a change. We owe it to all our electors and the economy generally to try to get the matter right.

Time is not generous, so I will be brief. My worry is that, under the previous Labour Government and in the early days of the coalition, we were running a strange policy in which, on the one hand, the Bank of England was trying to depress the vehicle’s accelerator by creating a lot of extra money and saying, “We really need to get some of this money out there to do some good in the economy.” On the other hand, the banking regulator was depressing the vehicle’s brake, saying, “No, you can’t possibly spend that money to create more credit and do more things. The priority is for the banks to sit on the money to have better cash and capital ratios. They probably need to wind down their loan books, which we think are too big.” My observation is that if we try to drive a vehicle with one foot on the accelerator and one on the brake, the brake normally wins.

Mr Ruffley:
As has been mentioned already, some in the Bank, including Sir Mervyn King, argued that insufficient lending is a consequence of insufficient capital. I put that to Mr Bailey a few days ago in the Treasury Committee. I asked him about the net new lending level now compared with when funding for lending began last August, and he said that it was flat. Is that not evidence for his proposition that we cannot have tighter adequacy requirements on capital and lots more new lending? The figures show that lending is flat.

Mr Redwood:
Indeed. That point also shows that we need banks to be profitable—particularly RBS, which is still largely state owned. Until the bank is making profits, its capital ratios will not improve quickly enough and it will then not be in a position to lend the money that the Government would like it to. The taxpayer

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would be grateful if it could be more profitable, because our shares would be worth more, which would be in the general interest.

I conclude by making the same point to the Minister. Yes, I want us to get to stronger banks with tighter ratios, but I want us to get there through growth and growth in bank profits—particularly for HBOS and RBS, in which we have a large state stake and whose results have been disappointing for a number of years. If we can get to that happy position, we can have a bit of growth and some more profitability and then the regulator will have to have a sensible conversation with the banks; it will say that some of the money has to be put into cash and capital so that they are stronger. We will be the better for that.

Mr McFadden:
I will not detain the Chamber for long; I just want to make a few points.

The argument is really about complexity versus simplicity in how banks are regulated. One of the points that my hon. Friend the Member for Nottingham East (Chris Leslie) is trying to bring out is the inadequacy of the over-complex Basel regulations, which have allowed banks to game the system and say they had hugely different capital ratios on similar classes of assets in different institutions. The truth is that the Basel system is so complex that it does not give confidence about the safety of our banks. That is why this debate about leverage is so important.

In all the debate about ring-fencing, separation and so on, what has perhaps been under-discussed is the fact that not enough attention has been paid to leverage—a basic measure of banks’ safety or resilience against future risks and very important in respect of banks’ ability to absorb losses. One of the features consistently pointed out, both to the Treasury Committee and the Parliamentary Commission on Banking Standards, was that in the run-up to the crisis banks were hugely over-leveraged. That meant that their capacity to absorb and deal with problems when they came was minimal.

Our banks still have very high gearing today. The banks lobby hard on the issue. I counsel caution on the basic trade-off that has been raised about lending and leverage. There are other ways for banks to improve their capital ratios than simply by reducing lending. They could, for example, look at the proportion that they give out in remuneration every year; that could make a difference to their capital ratios. Over the past decade or two, vast amounts of money have been paid out in remuneration that could have improved capital ratios without having any effect at all on lending. Let us not fall for the argument that we can either have banks that lend, or safe banks, but we cannot have both. It would be wrong of us to fall into that false dichotomy. We should aim for banks that are both safe and have the ability to lend.

7.45 pm

There is also the international dimension. Part of the rationale for the Government’s current position on the 3% leverage ratio—or a leverage ratio of 33:1, if we want to put it that way—is that it is part of the new Basel regime. However, we have a particular issue in the UK. We are a global—some would say the main global—financial centre, but in a medium-sized economy. That gives us many great strengths, to which the hon. Member

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for Wyre Forest (Mark Garnier) alluded in the earlier debate. There are the associated services of law, consultancy and the rest of it. That is true. Those provide good employment and tax revenue and make Britain an attractive place to do business. However, we must not be so blinded by that that we do not take the necessary measures to insulate the rest of our economy from the risks.

We know that those risks are real, because we are still living with the consequences of them following the crisis. The leverage ratio is absolutely at the heart of that, so there is an important British reason why we should think twice about simply going along with minimum international requirements.

It is incumbent on us as policy makers in this House, and on regulators who have responsibility for the issue, to look at Britain’s specific circumstances as a global financial centre with a medium-sized economy, so that we keep the strengths that that entails without the rest of the economy, taxpayers or the Government being held to ransom.

Greg Clark:
It is a pleasure to respond to this important debate. First, I should like to correct a grievous omission in my previous remarks. During my paean to the members of the parliamentary commission, I neglected to include my hon. Friend the Member for Wyre Forest (Mark Garnier), who was behind me and therefore was invisible to me. He has been in the Chamber throughout this debate and his contribution is no less sterling and distinguished than those of the other parliamentary commission members whom I did mention. I apologise.

The new clause requires the Treasury to set a leverage target for the

“overall leverage of the…financial system”.

I welcome what I think is the spirit of the new clause. Problems with risk weights clearly contributed to the financial crisis; the right hon. Member for Wolverhampton South East (Mr McFadden) made that point. Those problems must be addressed if risk weights are to have a place in the regulatory regime of the future.

I also share the concerns raised by the parliamentary commission about the importance of having a robust minimum leverage ratio required by the regulator. As my right hon. Friend the Member for Wokingham (Mr Redwood) said, there is clearly support among Members on both sides of the House for that notion. We have consistently argued for a binding minimum leverage ratio to be implemented internationally, to supplement the risk-weighting requirements.

As has been said, the Basel III standard of 3% will come into force in 2018, following an observation period beforehand and a final calibration of the leverage ratio in 2017. Of course, national supervisors must be equipped to respond to new risks as they emerge in banks and financial markets. The PRA, in this country, is empowered to ensure that banks’ risk models are appropriately conservative and, where necessary, to set higher capital requirements.

As every hon. Member will be aware, the PRA has recently announced that major UK banks need to set out and implement plans to improve their leverage ratios and so to migrate further towards the new Basel III standard even now. The FPC has already been given a number of directive powers, including a counter-cyclical

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capital buffer and the power to set time-varying sectoral capital requirements. The Government have also made clear their intention to give the FPC the power to vary through time the baseline leverage ratio requirement, always subject to its never being below the requirement determined by Basel III.

Let me address the new clause, in whose support the hon. Member for Nottingham East (Chris Leslie) spoke. The first thing to say is that it requires the Treasury to give the Bank of England a target for the overall leverage of the UK’s financial system; I think I understand the hon. Gentleman correctly when I see an allusion to the inflation target perhaps given to the Bank of England. I have to say, though, that that pulls in the opposite direction to the parliamentary commission’s recommendation, which calls for the FPC—in other words, the Bank of England—to be given the power to determine leverage ratios. In its first and final reports, it noted that

“the leverage ratio is a complex and technical decision best made by the regulator and it certainly should not be made by politicians.”

The new clause cuts across the views of the parliamentary commission, if delivering that recommendation were its intention.

Moreover, the new clause would require a target for the overall leverage of the UK’s financial system. Again, this is not quite the right approach. Banks should certainly be subject to individual leverage requirements to ensure that they have sufficient capital to absorb losses, but an average leverage ratio for the entire financial sector could serve to conceal the risks in particular institutions. It would seem perverse to require the Treasury to set a target for overall leverage and so create an onus on the FPC to allow some banks to remain highly leveraged as long as this is offset by smaller or more conservative institutions running with less leverage. A system-wide average, or net, leverage ratio might be of little value in tackling excesses of leverage, and it could be positively counter-productive.

Another feature of the new clause would be dangerous. The proposal for a target requires the FPC to pursue action to meet the target. It is suggested that the FPC take action to increase leverage in the system when it is less than the target level that the Government are required to set. I am not clear how or why the FPC would want to do that. The target approach seems to me to be wrong. Financial stability is not like price stability; it cannot be boiled down to a single, symmetrical target. As a recent Bank of England paper concluded:

“No single set of indicators can ever provide a perfect guide to systemic risks, or to the appropriate policy responses…Judgement will, therefore, play a material role in all FPC decisions and policy will not be mechanically tied to any specific set of indicators.”

We need to apply caution in any consideration of enshrining in law a system that focuses on one target for systematic financial stability. Goodhart’s law is relevant in these circumstances:

“When a measure becomes a target, it ceases to be a good measure.”

I therefore hope that on reflection the hon. Gentleman will withdraw his new clause.

Chris Leslie:
I am grateful for the quality of the debate that has taken place in the short time we have had.

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I am glad that we tabled this new clause on leverage, because otherwise we would not have had the opportunity to start to focus on the issue. I understand what the right hon. Member for Wokingham (Mr Redwood) said about getting the balance right and the care and caution that are needed as we move towards what we want, which is a better, safer level of leverage within the overall system. It is worth reiterating that we want to do this only to make sure that banks do not over-extend themselves and become so lopsided that when they topple over they are not able to absorb the losses should things take a turn for the worse.

I am particularly grateful for the contribution from my right hon. Friend the Member for Wolverhampton South East (Mr McFadden), who rightly pointed out that saying that we need action either on leverage or on getting lending going into the real economy does not represent opposite poles of the argument. It is not as clear as that. Some are arguing not only that the extra capital could be lent out but, as he said, that compensation ratios, as they are sometimes known—the remuneration levels within banks—could also be tackled. Given that we are the major financial centre worldwide, we should not just be leaving this to international regulators. We certainly should not be leaving it to the European Union completely to decide these things for us. We have a duty in the UK to make sure that we think these things through properly and spend much more time on them.

Mark Garnier:
The hon. Gentleman proposes that the individual leverage ratios of the banks be published, but if that information were in the public domain it could have implications for a bank’s funding costs. If the regulator deems that a particular institution has a greater risk, and therefore looks at a lower leverage, that will clearly have implications for the business.

Chris Leslie:
I would tend to err on the side of publication and transparency. It is long overdue that we have better insight into banks’ balance sheets and the quality of their assets generally.

If we are to have this architecture, it could be a useful dynamic to have a leverage target set by policy makers—by Government. I slightly take issue with the parliamentary commission on this. There is a systemic aspect that ought to rest in the hands of politicians. Ultimately, the buck stops with us and Parliament is sovereign; the arguments about that are well known. However, as the commission said, the operational decisions taken institution by institution have to be left to the regulator. It would be invidious for that to be in the hands of the Treasury.

Mr Redwood:
RBS, against the wishes of some of us, had been allowed to grow to a colossal size and to gear excessively. At the point when it got into trouble, it had a balance sheet of £2.2 trillion —almost four times the tax revenue of the state—and if it lost 2% of its asset value it lost the equivalent of the defence budget for a whole year. Is not that of interest to those conducting government?

Chris Leslie:
There is a rare consensus across the Chamber in some respects. We have to agree that the UK economy, whether it is mid-sized or not, is potentially adversely affected by our vast financial sector.

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I offered new clause 9 in the spirit of consensus to try to get some engagement from the Government. I am disappointed by the Minister’s attitude of saying, “We’ll just leave this and do it internationally. We’ll come to it in 2018 through the normal conveyor belt.” The Government must address this issue far more constructively and engage with it far more seriously, because it really does matter. We need action on leverage and it is important that we put on record the essential characteristics that it could and should have within our economy as a whole. I am afraid that I therefore wish to test the view of the House.

Question put, That the clause be read a Second time.

The House divided:

Ayes 211, Noes 271.

Division No. 47]

[

7.57 pm

AYES

Abbott, Ms Diane

Abrahams, Debbie

Ainsworth, rh Mr Bob

Alexander, rh Mr Douglas

Alexander, Heidi

Ali, Rushanara

Allen, Mr Graham

Anderson, Mr David

Ashworth, Jonathan

Austin, Ian

Bailey, Mr Adrian

Bain, Mr William

Balls, rh Ed

Banks, Gordon

Barron, rh Mr Kevin

Beckett, rh Margaret

Begg, Dame Anne

Benn, rh Hilary

Berger, Luciana

Betts, Mr Clive

Blackman-Woods, Roberta

Blears, rh Hazel

Blomfield, Paul

Blunkett, rh Mr David

Bradshaw, rh Mr Ben

Brennan, Kevin

Brown, rh Mr Nicholas

Brown, Mr Russell

Bryant, Chris

Buck, Ms Karen

Burden, Richard

Byrne, rh Mr Liam

Campbell, Mr Alan

Campbell, Mr Ronnie

Caton, Martin

Champion, Sarah

Chapman, Jenny

Clark, Katy

Clarke, rh Mr Tom

Coaker, Vernon

Coffey, Ann

Connarty, Michael

Cooper, Rosie

Cooper, rh Yvette

Corbyn, Jeremy

Crausby, Mr David

Creagh, Mary

Creasy, Stella

Cruddas, Jon

Cryer, John

Cunningham, Alex

Cunningham, Mr Jim

Cunningham, Sir Tony

Curran, Margaret

Dakin, Nic

David, Wayne

Davidson, Mr Ian

Davies, Geraint

De Piero, Gloria

Denham, rh Mr John

Dobson, rh Frank

Docherty, Thomas

Donaldson, rh Mr Jeffrey M.

Donohoe, Mr Brian H.

Doran, Mr Frank

Doughty, Stephen

Dowd, Jim

Doyle, Gemma

Dromey, Jack

Durkan, Mark

Eagle, Ms Angela

Eagle, Maria

Edwards, Jonathan

Ellman, Mrs Louise

Engel, Natascha

Esterson, Bill

Evans, Chris

Farrelly, Paul

Fitzpatrick, Jim

Flello, Robert

Flint, rh Caroline

Flynn, Paul

Fovargue, Yvonne

Francis, Dr Hywel

Gapes, Mike

Gardiner, Barry

Gilmore, Sheila

Glass, Pat

Glindon, Mrs Mary

Godsiff, Mr Roger

Goggins, rh Paul

Goodman, Helen

Green, Kate

Greenwood, Lilian

Griffith, Nia

Gwynne, Andrew

Hain, rh Mr Peter

Hamilton, Fabian

Hanson, rh Mr David

Harman, rh Ms Harriet

Harris, Mr Tom

Havard, Mr Dai

Healey, rh John

Hepburn, Mr Stephen

Hermon, Lady

Hodgson, Mrs Sharon

Hoey, Kate

Hopkins, Kelvin

Hosie, Stewart

Howarth, rh Mr George

Hunt, Tristram

Irranca-Davies, Huw

Jackson, Glenda

Jamieson, Cathy

Jarvis, Dan

Johnson, rh Alan

Jones, Graham

Jones, Helen

Jones, Mr Kevan

Jones, Susan Elan

Kaufman, rh Sir Gerald

Keeley, Barbara

Kendall, Liz

Khan, rh Sadiq

Lavery, Ian

Leslie, Chris

Lewell-Buck, Mrs Emma

Lewis, Mr Ivan

Long, Naomi

Love, Mr Andrew

Lucas, Caroline

Lucas, Ian

Mahmood, Shabana

Mann, John

Marsden, Mr Gordon

McCabe, Steve

McCann, Mr Michael

McCarthy, Kerry

McClymont, Gregg

McDonagh, Siobhain

McFadden, rh Mr Pat

McGuire, rh Mrs Anne

McKechin, Ann

McKenzie, Mr Iain

McKinnell, Catherine

Meacher, rh Mr Michael

Mearns, Ian

Miller, Andrew

Morden, Jessica

Morrice, Graeme

(Livingston)

Morris, Grahame M.

(Easington)

Mudie, Mr George

Munn, Meg

Murphy, rh Mr Jim

Murray, Ian

Nandy, Lisa

Nash, Pamela

O'Donnell, Fiona

Onwurah, Chi

Osborne, Sandra

Pearce, Teresa

Perkins, Toby

Phillipson, Bridget

Pound, Stephen

Raynsford, rh Mr Nick

Reed, Mr Jamie

Reed, Mr Steve

Reynolds, Emma

Reynolds, Jonathan

Riordan, Mrs Linda

Ritchie, Ms Margaret

Robertson, Angus

Robertson, John

Robinson, Mr Geoffrey

Rotheram, Steve

Roy, Mr Frank

Roy, Lindsay

Ruddock, rh Dame Joan

Sarwar, Anas

Sawford, Andy

Seabeck, Alison

Sharma, Mr Virendra

Sheridan, Jim

Shuker, Gavin

Skinner, Mr Dennis

Slaughter, Mr Andy

Smith, rh Mr Andrew

Smith, Nick

Smith, Owen

Spellar, rh Mr John

Stuart, Ms Gisela

Sutcliffe, Mr Gerry

Tami, Mark

Thornberry, Emily

Timms, rh Stephen

Turner, Karl

Twigg, Derek

Twigg, Stephen

Umunna, Mr Chuka

Vaz, Valerie

Watts, Mr Dave

Weir, Mr Mike

Whitehead, Dr Alan

Wilson, Phil

Winnick, Mr David

Wishart, Pete

Wood, Mike

Woodcock, John

Woodward, rh Mr Shaun

Wright, David

Wright, Mr Iain

Tellers for the Ayes:

Alison McGovern

and

Tom Blenkinsop

NOES

Adams, Nigel

Afriyie, Adam

Aldous, Peter

Amess, Mr David

Andrew, Stuart

Bacon, Mr Richard

Baker, Steve

Baldry, Sir Tony

Baldwin, Harriett

Barclay, Stephen

Barker, rh Gregory

Barwell, Gavin

Bebb, Guto

Benyon, Richard

Berry, Jake

Bingham, Andrew

Blackman, Bob

Blackwood, Nicola

Boles, Nick

Bone, Mr Peter

Bottomley, Sir Peter

Bradley, Karen

Brake, rh Tom

Bray, Angie

Brazier, Mr Julian

Bridgen, Andrew

Brokenshire, James

Brooke, Annette

Bruce, Fiona

Burley, Mr Aidan

Burns, Conor

Burns, rh Mr Simon

Burrowes, Mr David

Burstow, rh Paul

Burt, Alistair

Burt, Lorely

Byles, Dan

Cairns, Alun

Campbell, rh Sir Menzies

Carmichael, rh Mr Alistair

Carmichael, Neil

Carswell, Mr Douglas

Chishti, Rehman

Clappison, Mr James

Clark, rh Greg

Clarke, rh Mr Kenneth

Clifton-Brown, Geoffrey

Coffey, Dr Thérèse

Collins, Damian

Colvile, Oliver

Cox, Mr Geoffrey

Crabb, Stephen

Crockart, Mike

Crouch, Tracey

Davey, rh Mr Edward

Davies, Glyn

Dinenage, Caroline

Djanogly, Mr Jonathan

Dorrell, rh Mr Stephen

Doyle-Price, Jackie

Drax, Richard

Duncan, rh Mr Alan

Duncan Smith, rh Mr Iain

Ellis, Michael

Ellison, Jane

Ellwood, Mr Tobias

Elphicke, Charlie

Eustice, George

Evans, Graham

Evans, Jonathan

Evennett, Mr David

Fabricant, Michael

Fallon, rh Michael

Farron, Tim

Field, Mark

Fox, rh Dr Liam

Francois, rh Mr Mark

Freeman, George

Freer, Mike

Fullbrook, Lorraine

Fuller, Richard

Gale, Sir Roger

Garnier, Sir Edward

Garnier, Mark

Gauke, Mr David

Gibb, Mr Nick

Gilbert, Stephen

Gillan, rh Mrs Cheryl

Glen, John

Goodwill, Mr Robert

Graham, Richard

Grant, Mrs Helen

Gray, Mr James

Grayling, rh Chris

Grieve, rh Mr Dominic

Griffiths, Andrew

Gyimah, Mr Sam

Halfon, Robert

Hames, Duncan

Hammond, rh Mr Philip

Hammond, Stephen

Hancock, Matthew

Hancock, Mr Mike

Hands, Greg

Harper, Mr Mark

Harrington, Richard

Harris, Rebecca

Hart, Simon

Haselhurst, rh Sir Alan

Hayes, rh Mr John

Heald, Oliver

Heath, Mr David

Hemming, John

Henderson, Gordon

Herbert, rh Nick

Hinds, Damian

Hoban, Mr Mark

Hollingbery, George

Hollobone, Mr Philip

Holloway, Mr Adam

Hopkins, Kris

Howarth, Sir Gerald

Howell, John

Hughes, rh Simon

Hunt, rh Mr Jeremy

Jenkin, Mr Bernard

Jones, Andrew

Jones, Mr Marcus

Kawczynski, Daniel

Kelly, Chris

Kirby, Simon

Knight, rh Mr Greg

Kwarteng, Kwasi

Laing, Mrs Eleanor

Lamb, Norman

Lancaster, Mark

Lansley, rh Mr Andrew

Latham, Pauline

Laws, rh Mr David

Leadsom, Andrea

Lee, Jessica

Lee, Dr Phillip

Leech, Mr John

Letwin, rh Mr Oliver

Lewis, Brandon

Lewis, Dr Julian

Liddell-Grainger, Mr Ian

Lidington, rh Mr David

Lilley, rh Mr Peter

Lloyd, Stephen

Loughton, Tim

Luff, Peter

Lumley, Karen

Macleod, Mary

May, rh Mrs Theresa

Maynard, Paul

McCartney, Karl

McIntosh, Miss Anne

McPartland, Stephen

McVey, Esther

Menzies, Mark

Metcalfe, Stephen

Miller, rh Maria

Mills, Nigel

Milton, Anne

Mitchell, rh Mr Andrew

Moore, rh Michael

Mordaunt, Penny

Morris, Anne Marie

Morris, James

Mosley, Stephen

Mowat, David

Mulholland, Greg

Mundell, rh David

Munt, Tessa

Murray, Sheryll

Murrison, Dr Andrew

Neill, Robert

Newmark, Mr Brooks

Newton, Sarah

Nokes, Caroline

Norman, Jesse

Nuttall, Mr David

Offord, Dr Matthew

Ollerenshaw, Eric

Opperman, Guy

Ottaway, Richard

Paice, rh Sir James

Parish, Neil

Patel, Priti

Paterson, rh Mr Owen

Pawsey, Mark

Penning, Mike

Penrose, John

Pickles, rh Mr Eric

Pincher, Christopher

Poulter, Dr Daniel

Prisk, Mr Mark

Pugh, John

Raab, Mr Dominic

Randall, rh Mr John

Reckless, Mark

Redwood, rh Mr John

Rees-Mogg, Jacob

Reevell, Simon

Reid, Mr Alan

Rogerson, Dan

Rosindell, Andrew

Rudd, Amber

Ruffley, Mr David

Russell, Sir Bob

Rutley, David

Sanders, Mr Adrian

Sandys, Laura

Scott, Mr Lee

Selous, Andrew

Shapps, rh Grant

Shelbrooke, Alec

Simpson, Mr Keith

Skidmore, Chris

Smith, Miss Chloe

Smith, Henry

Smith, Sir Robert

Soames, rh Nicholas

Spencer, Mr Mark

Stephenson, Andrew

Stevenson, John

Stewart, Bob

Stewart, Iain

Stewart, Rory

Streeter, Mr Gary

Stride, Mel

Stunell, rh Sir Andrew

Sturdy, Julian

Swales, Ian

Swayne, rh Mr Desmond

Swinson, Jo

Swire, rh Mr Hugo

Syms, Mr Robert

Teather, Sarah

Thurso, John

Timpson, Mr Edward

Tomlinson, Justin

Truss, Elizabeth

Turner, Mr Andrew

Tyrie, Mr Andrew

Uppal, Paul

Vara, Mr Shailesh

Vickers, Martin

Walker, Mr Charles

Walker, Mr Robin

Wallace, Mr Ben

Ward, Mr David

Weatherley, Mike

Webb, Steve

Wharton, James

Wheeler, Heather

White, Chris

Whittaker, Craig

Whittingdale, Mr John

Wiggin, Bill

Willetts, rh Mr David

Williams, Mr Mark

Williams, Stephen

Williamson, Gavin

Willott, Jenny

Wilson, Mr Rob

Wollaston, Dr Sarah

Wright, Simon

Young, rh Sir George

Zahawi, Nadhim

Tellers for the Noes:

Nicky Morgan

and

Mark Hunter

Question accordingly negatived.

8 July 2013 : Column 115

8 July 2013 : Column 116

8 July 2013 : Column 117

New Clause 2

Burden of proof: persons performimg significant influence functions

‘(1) The Financial Services and Markets Act 2000 is amended as follows.

(2) In section 66 (disciplinary powers), at end insert—

“(10) In determining whether a person performing a significant influence function is guilty of misconduct under this section, where some evidence of misconduct exists, it shall be for him to prove his standard of behaviour was reasonable in all the circumstances.”.’.—(Stephen Barclay.)

Brought up, and read the First time.

8 July 2013 : Column 118

Stephen Barclay:
I beg to move, That the clause be read a Second time.

Mr Deputy Speaker (Mr Lindsay Hoyle):
With this it will be convenient to discuss the following:

New clause 3—Professional standards—

‘After section 65 of FSMA 2000 insert—

“65A Professional Standards

(1) The regulator will raise standards of professionalism in financial services by mandating a licensing regime based on training and competence. This must—

(b) specify minimum thresholds of competence including integrity, professional qualifications, continuous professional development and adherence to a recognised code of conduct and revised Banking Standards Rules;

(c) make provisions in connection with—

(i) the granting of a licence;

(ii) the refusal of a licence;

(iii) the withdrawal of a licence; and

(iv) the revalidation of a licensed person of a prescribed description whenever the appropriate regulator sees fit, either as a condition of the person continuing to hold a licence or of the person’s licence being restored;

(d) be evidenced by individuals holding an annual validation of competence;

(e) include specific provision for a Senior Persons Regime in relation to activities involving the exercise of a significant influence over a controlled function under section 59 of the Act.

(2) In section 59, remove “authorised” and insert “licensed” throughout the section.”.’.

New clause 4—Duty of Care—

‘At all times when carrying out core activities a ring-fenced body shall—

(a) be subject to a fiduciary duty towards its customers in the operation of core services; and

(b) be subject to a duty of care towards it customers across the financial services sector.’.

New clause 5—Remuneration reform—

‘Within six months of Royal Assent of this Act the Chancellor of the Exchequer shall, in consultation with the appropriate regulation, lay before Parliament proposals on reform of remuneration at UK financial institutions which shall include incentives to take account of the performance and stability of a UK financial institution over a five- to 10-year period.’.

New clause 7—Protection for whistleblowers—

‘(1) After section 43B(f) of the Employment Rights Act 1996 there is inserted—

“(g) that a breach of regulated activities under FSMA 2000 or the Financial Services Act 2012 has been committed, is being committed, or is likely to be committed.”.

(2) After section 43B(5) of the Employment Rights Act 1996 there is inserted—

“The chairman of the board of directors of any relevant UK financial institution will be informed of any protected disclosure made by a worker which qualifies under the terms of Part IVA of this Act.”.’.

New clause 11—Reckless misconduct in the management of a bank—

‘(1) Within the three months of Royal Assent of this Act the Government shall publish proposals for the creation of a new criminal offence of reckless misconduct in the management of a bank.

8 July 2013 : Column 119

(2) The new offence in subsection (2) should cover those approved persons who are licensed under a Senior Persons Regime.

(3) The Government shall bring forward further proposals within three months of Royal Assent of this Act for the civil recovery of monies obtained by individuals who have been found guilty of reckless misconduct in the management of a bank.’.

New clause 13—Financial Services Crime Unit—

‘(1) The Treasury shall conduct a review into the creation of a Financial Services Crime Unit and consult on its proposals for the Financial Services Crime Unit’s powers and responsibilities.

(2) The Treasury shall lay its proposals before both Houses of Parliament no later than six months after this Act comes into force.’.

Stephen Barclay:
In speaking to new clause 2, which I will not press to a vote, I wish to follow the line of argument pursued by my right hon. Friend the Member for Wokingham (Mr Redwood) on new clause 9. He drew attention to the tension created by building up capital while also lending more and used the analogy of driving with one foot on the accelerator and the other on the brake. If I may, I will take a step outside the car. With new clause 2, I wish to draw the House’s attention to a similar, I am sure unintended tension. The Government are taking a positive step forward, because in paragraphs 2.13 and 2.14 of their response to the parliamentary commission’s report, they make the welcome announcement that they accept the premise of reversing the burden of proof. In doing so, however, they will adopt a measure suggested in paragraphs 1170 and 1171 of the commission’s report that will create a potential handicap. A new condition will be attached to using that burden of proof, whereby the regulator must have concluded a successful enforcement action against the firm prior to doing so.

I do not think there can be any doubt about the merits of reversing the burden of proof. It is clear that if the regulator is required to sift through reams of e-mails looking for evidence to incriminate a senior banker, it will be a time-consuming and costly exercise. It is also highly likely that it will fail, because senior executives are not so stupid as to write boastful and wilful e-mails such as we saw from some of the LIBOR traders, who bragged of having their bottles of Bolly. Most senior executives are wise to the risks of e-mails and would not fall into such a trap. It is proportionate and reasonable to argue that senior executives who say that their hands-on leadership is sufficient to justify very high individual bonuses should also, on the other side of the coin, be able to demonstrate that they have personally acted reasonably.

The Government’s announcement that they will reverse the burden of proof is extremely welcome. However, the acceptance of paragraph 1171 of the Commission’s report could lead to a real impediment. If we open the door to personal enforcement, why would a chief executive wish to settle on behalf of their firm? We are trying to make it easier for the regulator to focus in a time-efficient and cost-effective manner on the individuals who should be held responsible, but that will be impeded by the additional requirement for enforcement to be concluded against the firm. The senior leadership whom we want to target will be incentivised to drag out proceedings and impede any settlement with the firm. I do not believe that is the Government’s intention, but I wished

8 July 2013 : Column 120

to draw the Minister’s attention to it so that the issue could be discussed in more detail and tackled in the other place.

I do not share the confidence of some colleagues who have spoken about the ability of criminal sanctions to operate effectively. They are a welcome tool to have, and many of our constituents would like the golden handcuffs to be replaced with the prison variety. Indeed, the images on US television of white-collar arrests and convictions have a powerful deterrent effect. My concern, however, is that if we look at the individual fines and enforcement to date, we see that the regulator has struggled to reach the evidential level required to prosecute individuals successfully. Now we are suggesting that it will have to meet a higher standard of proof to secure criminal convictions. It is a bit like asking a hurdler who has just failed at one level to jump over a much higher hurdle.

The reversal of the burden of proof is one aspect of what we need, and the deterrent effect of criminal sanctions is another, because it brings with it the power of the headline. The question is, will we fall into the trap that we so often fall into in this House of passing legislation that sounds tough but proves difficult to use in practice? My fear is that the standard of proof required of the regulator to deliver a criminal prosecution will make it a tool that is rarely used.

We therefore need to consider how we can target individuals, not firms, because that will drive the culture of firms. Currently, where there is wrongdoing, a firm will settle quickly and get a 30% discount. The more junior staff—the heads of the divisions responsible—are quickly exited, and the senior staff wilfully claim blindness, because the most controversial briefings are usually done orally. Reversing the burden of proof will address part of the ill, but through the new clause I wish to draw attention to the limitations of fines on firms, which at the end of the day penalise shareholders and pension funds. Our constituents pay twice—first for the bail-out, and then through the impact on their shareholding.

8.15 pm

That is why I would resist the temptation, however siren the voices, to follow the US model of much higher fines, even though the Government’s change, whereby fines will now go to good causes, is welcome. Under the Labour party, fines bizarrely benefited other banks, so the more banks behaved badly, the more other banks benefited. That was a bizarre incentive in the regulatory model that the current shadow Chancellor put in place, and I welcome the fact that we have fixed it. However, high fines against firms invariably punish the shareholders, not the senior executives responsible.

When the Financial Services and Markets Act 2000 first went through the House and was debated for many hours in the Chamber, it was felt that reputational harm would be a deterrent to firms. Indeed, the Act made specific reference to the fact that firms should be named, as though customers would be so shocked by the bad behaviour of a specific bank that they would take their business elsewhere. I think it is reasonable to conclude that shame has not had the intended effect. Indeed, when an executive can name a horse Fatcatinthehat, it is clear that shame is not a deterrent.

New clause 2 would build on a fix that the Government have already put in place, the reversal of the burden of proof. The objective behind it is more modest than the

8 July 2013 : Column 121

aspiration for criminal sanctions, which are attractive but, I fear, limited in their practical application. It is also intended to address a potential flaw in the parliamentary commission’s report, which was otherwise a first-class piece of work, whereby there will be a potential disincentive for executives to settle any enforcement action against their firm if in doing so they leave themselves open to individual fines.

We need not more laws but to address the culture within banks and financial services. We pay senior executives in those institutions to assess risk. If the highest fine associated with the 2008 banking collapse is less than the bonuses of those executives in the preceding year, as is currently the case, it is logical that executives will assess the risk of being caught and of a paltry fine as being a risk worth taking. If the penalty is against the firm and not against them as individuals, that will further embolden them to take risks from which they personally benefit. That is why I seek to draw the Financial Secretary’s attention to the opportunity offered by new clause 2 to reverse the burden of proof without condition, so that we can hit those responsible for future failure personally and where it hurts most—in their pocket.

Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op):
It is a pleasure to speak to this group of new clauses, and I thank members of the banking commission—a number of whom are with us today—for their thoughtful work, and for the time and energy they put into ensuring that we had a series of recommendations, which have given us the opportunity to table a number of amendments in Committee and on Report.

The Opposition tabled amendments in Committee to reflect the commission’s recommendations, but for various reasons—some of which I could understand and some of which I could not—the Government did not see fit to accept them. There was some disappointment when we got the opportunity to scrutinise the original Bill that it was so thin—to be fair, the Government recognised that in their response published today, but we must get to annex B2 to find that acknowledgment. At times it would have been good to have a clearer indication of the Government’s direction of travel, and perhaps some of the details to discuss in Committee. As is often said, however, we are where we are, and we are now discussing the Bill in the context of the report published today.

No doubt all Members have had the opportunity to read the Government’s report, which provides a slightly more detailed response to the report by the Parliamentary Commission on Banking Standards. There are, however, some areas where clarification or further information from the Minister would be helpful. The new clauses were tabled before we were aware of which provisions the Government intended to accept, and we may have tabled a number of them differently—or not at all—had we known their intentions. Nevertheless, there are a couple of issues that we believe are not covered by the report and the Government’s response.

To put my remarks in context, the areas where quick implementation can be taken forward have been highlighted and the issues that require more detailed work have been identified. Where the Government do not agree with the commission has also identified. I will come to some specific issues in the new clauses, but it is worth

8 July 2013 : Column 122

noting that the Government now accept the need for change and action in a number of areas in which the Opposition have consistently made the case on Second Reading, in Committee and today.

The Government have announced plans to implement measures to improve individual accountability, and some of our new clauses relate to that in the overall context of conduct and remuneration. The Government have mentioned the tough new senior persons regime governing the behaviour of senior bank staff, outlined a willingness to take forward work on new banking standards rules to promote higher standards for bank staff, and—this was controversial in some quarters—we are pleased that they have at last decided to introduce a new criminal offence for reckless misconduct for senior bankers. We have heard from the hon. Member for North East Cambridgeshire (Stephen Barclay) about reversing the burden of proof so that bank bosses are held accountable for breaches within their areas of responsibility. The Government have made further commitments to work with regulators to implement the commission’s proposals on pay, allowing bonuses to be deferred for up to 10 years, and enabling 100% clawback of bonuses where banks receive state aid. All those areas are relevant to our discussion.

Some of the proposed reforms are either already enshrined in EU legislation or are part of forthcoming EU legislation, in some cases specifically relating to bonuses capped to salaries and bonus limits on bailed-out banks. Therefore, the Government would have had to consider the issue anyway, notwithstanding the fact that the Opposition have been pressing them to do so.

On new clause 2, the hon. Member for North East Cambridgeshire spoke eloquently about the culture involved. We can debate legislation and change as many regulations as we like, but if we do not get into the heads of those who make decisions and create that culture, we will not change enough to ensure that past scenarios do not happen in the future. The hon. Gentleman said that he did not intend to push the new clause to the vote. I had assumed that perhaps the Government would have agreed to it and that he would have been acclaimed as the favoured son who had tabled a new clause that the Government accepted—and therefore his record would have been better than mine; throughout the Bill’s time in Committee, I managed to get only one word changed, much to the chagrin of my hon. Friend the Member for Nottingham East (Chris Leslie).

New clause 3 was inspired by the commission, and builds on an amendment that was tabled in Committee and recommendations in the commission’s final report. It would introduce a licensing regime for